SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549FORM 10-K
|X|x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934For The Fiscal Year Ended
July 1, 2000June 29, 2002OR
|_|o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934For the transition period from __________ to ___________
Commission File No. 1-15583
DELTA APPAREL, INC.
(Exact
(Exact name of registrant as specified in its charter)Georgia 58-2508794 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization)
Georgia
(State or other jurisdiction of
incorporation or organization)58-2508794
(I.R.S. Employer Identification No.)2750 Premiere Parkway, Suite 100
Duluth, Georgia 30097(Address
(Address of principal executive offices) (zip code)Registrant'sRegistrant’s telephone number, including area code: (678) 775-6900
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered ------------------- ------------------- Common Stock, par value $0.01 American Stock Exchange Common Stock Purchase Rights American Stock Exchange
Title of Each Class on Which Registered Common Stock, par value $0.01 American Stock Exchange Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
|X|x No|_|oIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
Registrant'sRegistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.|_|oAs of August 12, 2002, there were outstanding 2,019,151 shares of the registrant’s common stock (prior to adjustment to reflect the 2-for-1 stock split effective as of September 20,
2000, there were outstanding 2,411,643 shares of the registrant's common stock,2002), par value $0.01, which is the only class of outstanding common or voting stock of the registrant. As of that date, the aggregate market value of the shares of common stock held by nonaffiliates of the registrant (based on the closing price for the common stock on the American Stock Exchange onSeptember 20, 2000)August 12, 2002) was approximately$17.2$35.0 million.DOCUMENTS INCORPORATED BY REFERENCE
Portions of theCompany's Annual Report to Stockholders for the fiscal year ended July 1, 2000 are incorporated by reference into Parts I and II. Portions of the Registrant'sRegistrant’s definitive Proxy Statement to be filed pursuant to Regulation 14A for the20002002 Annual Meeting of Stockholders to be held on November7, 200012, 2002 are incorporated by reference into Part III of this report.TABLE OF CONTENTSPART I
ITEM 1. BUSINESS
FORWARD LOOKING STATEMENTS
The following discussion contains various
"forward-looking statements"“forward-looking statements”. All statements, other than statements of historical fact, that address activities, events or developments that Delta Apparel expects or anticipates will or may occur in the future are forward-looking statements. Examples are statements that concern future revenues, future costs, future capital expenditures, business strategy, competitive strengths, competitive weaknesses, goals, plans, references to future success or difficulties and other similar information. The words"estimate"“estimate”,"project"“project”,"forecast"“forecast”,"anticipate"“anticipate”,"expect"“expect”,"intend"“intend”,"believe"“believe” and similar expressions, and discussions of strategy or intentions, are intended to identify forward-looking statements.The forward-looking statements in this document are based on Delta
Apparel'sApparel’s expectations and are necessarily dependent upon assumptions, estimates and data that Delta Apparel believes are reasonable and accurate but may be incorrect, incomplete or imprecise. Forward-looking statements are also subject to a number of business risks and uncertainties, any of which could cause actual results to differ materially from those set forth in or implied by the forward-looking statements. Many of these risks and uncertainties are described under the subheading"Risk Factors"“Risk Factors” below and are beyond DeltaApparel'sApparel’s control. Accordingly, any forward-looking statements do not purport to be predictions of future events or circumstances and may not be realized.Delta Apparel does not undertake publicly to update or revise the forward-looking statements even if it becomes clear that any projected results will not be realized.
OVERVIEW BasedAll references in
Duluth, Georgia,this document to Delta Apparel refer to Delta Apparel, Inc., together with its subsidiaries.OVERVIEW
Delta Apparel, Inc.
(AMEX: DLA) ("(“DeltaApparel"Apparel” or the"Company")“Company) is a vertically integratedsuppliermanufacturer and marketer of high quality knitapparel, particularly T-shirts, sportswear and fleece goods. Approximately 97% of Delta Apparel's fiscal year 2000 sales were of T-shirts. Delta Apparelapparel. The Company specializes in sellingto the decorated knit apparel marketplace products such as blankundecorated T-shirts, golf shirts andfleece sweatshirts. Delta Appareltank tops directly to screen printers and other retail accounts. In addition, the Company sells its products to distributorsscreen printersand private label accounts.Delta Apparel is a Georgia corporation with its principal executive offices located at 2750 Premiere Parkway, Suite 100, Duluth, Georgia 30097 (telephone number: 678-775-6900).
As described below,The Company’s common stock trades onJune 30, 2000, Delta Apparel was spun-off as an independent company when Delta Woodside Industries, Inc. (NYSE: DLW) ("Delta Woodside") separated into three businesses. DELTA APPAREL DISTRIBUTION AND RELATED TRANSACTIONSthe American Stock Exchange under the symbol “DLA”.Delta Apparel was incorporated on December 10, 1999 as an indirect wholly-owned subsidiary of Delta
Woodside. Pursuant to a distribution agreement (the "Distribution Agreement"Woodside Industries, Inc. (NYSE: DLW, “Delta Woodside”)among. On June 30, 2000, Delta Woodside distributed all of the outstanding shares of Delta Appareland Duck Head Apparel Company, Inc., a Georgia corporation ("Duck Head"),to thefollowing transactions, among others, were completed inshareholders of Delta Woodside (the “Spin-off”). Prior to May 2000,(the "Intercompany Reorganization"): (a) Delta Woodside and its subsidiaries (other than Delta Mills, Inc.) contributed, as contributions to capital, all net debt amounts owed to anythe business ofthemthe Company was conducted bythe corporations that had been conductingthe Delta Apparel Companydivision's business, with certain exceptions. These intercompany contributionsdivision ofdebt did not, however, affect any obligation that Delta Woodside, Delta Apparel or Duck Head may have under the Distribution Agreement or the tax sharing agreement (the "Tax Sharing Agreement") among Delta Woodside, Delta Apparel and Duck Head. Prior to completion of the Intercompany Reorganization, the Delta Apparel Company division's assets were owned by several wholly-ownedvarious subsidiaries of DeltaApparel. (b) AllWoodside. In May 2000, Delta Woodside reorganized its subsidiaries and divisions, and all of the assetsused in theand operations of the Delta Apparel Companydivision's businessdivision were transferred toDelta Apparelthe Company or its subsidiary, and the Company became a direct wholly-owned subsidiary of DeltaApparelWoodside. Historical data for the periods prior tothe extent not already owned by Delta Apparel or its subsidiaries. This transfer included the sale by Delta Mills, Inc.June 30, 2000 pertain toDelta Apparel of the Rainsford plant, located in Edgefield, SC. (c) Delta Apparel assumed all of the liabilities ofthe Delta Apparel Company division of DeltaWoodside, and caused all holders of indebtedness for borrowed money that were part ofWoodside’s subsidiaries or theassumed Delta Apparel liabilities and all lessors of leases that were part of the assumed Delta Apparel liabilities to agree to look only to Delta Apparel or a subsidiary of Delta Apparel for payment of that indebtedness or lease (except where Delta Woodside or Duck Head, as applicable, consented to not being released from the obligations). On June 30, 2000, Delta Woodside completed the pro rata distribution (the "Delta Apparel Distribution") of all the outstanding shares of Delta Apparel and the pro rata distribution (the "Duck Head Distribution") of all the outstanding shares of Duck HeadCompany prior to theholders of record of Delta Woodside shares on June 19, 2000. In the Delta Apparel Distribution, Delta Woodside distributed one share of Delta Apparel common stock to each of those holders for every ten shares of Delta Woodside common stock owned of record by that holder. As a result of the Delta Apparel Distribution, Delta Apparel became on June 30, 2000 a separate public reporting company, the common stock of which trades on the American Stock Exchange under the symbol "DLA". 2BUSINESS The following information under this subheading, "Business" describes Delta Apparel as if the transactions contemplated by the Distribution Agreement had been consummated at the beginning of the periods described. All references in this document to Delta Apparel refer to Delta Apparel, Inc., together with its subsidiaries.Spin-off.PRODUCTS
MARKETING AND MANUFACTURINGDelta Apparel markets
a standard set ofhigh quality knit apparel garmentswith standard colorsthat include tee shirts, tanks and activewear tops. The Company’s products are marketed under the Pro Weight, Magnum Weight and Quail Hollow® brand names, as well as under private labels for both retail and branded apparel programs.DELTA PRO WEIGHT: The Pro Weight line represents a variety of 5.5 oz 100% cotton silhouettes. Short sleeve and long sleeve tees are available for youth and adult in a variety of styles and colors. Specialty items, including Baseball Practice Tees, Ringer Tees and adult tank tops, are also available.
2
DELTA MAGNUM WEIGHT: The Magnum Weight line also represents a variety of silhouettes in a heavier 6.1oz 100% cotton fabric. The basic strategy of this category is to offer consistent product in a wide range of styles and colors from juvenile through size 5X.
QUAIL HOLLOW®: The Quail Hollow® line includes golf shirts and ladies and junior tees. Ladies and juniors feature a variety of styles developed specifically for misses, plus sizes and young juniors. Golf shirts are provided in cotton jersey styles with fashion trims and solid color ringspun pique.
MARKETING
Delta
Apparel(R) label to distributors, who resell to printers, and directly to large printer accounts. Delta Apparel also supplies knit apparel to private label customers under the customers' label. Approximately 46% of Delta Apparel's sales are to screen printers and approximately 32% to distributors, with the balance of its sales to private label accounts. Generally, sales to distributors and large printers are driven by availability of competitive products and price. Margins are generally 4 to 10 percentage points higher in the private label business, which is also characterized by slightly higher customer loyalty. Delta Apparel'sApparel’s marketing is performed primarily by employed sales personnel located throughout the country. Delta Apparelmaintains aalso utilizes independent salesoffice in New York City.representatives. Sales personnel call directly on the retailtrade,marketplace, contactingdepartment stores, distributors,screen printing companies, distributors and massmarketers such as discount houses.marketers.Approximately 70% of Delta
Apparel also utilizes independentApparel’s fiscal 2002 salesrepresentatives to sellwere to screenprinting companies.printers and other direct customers, approximately 19% were to distributors, with the balance to private label accounts. In fiscal year 2002, the Company continued to focus on selling directly to screen printers and other direct customers, thereby increasing its sales to direct customers by over 15%. Generally, sales to screen printers and distributors are driven by the availability of competitive products and price, while sales in the private label business are characterized by slightly higher customer loyalty.The Company currently services over 1,200 customers. No single customer accounted for more than 10% of Delta Apparel’s sales in fiscal year 2002, 2001 or 2000. Part of Delta Apparel’s strategy is not to become dependent on any single customer.
Most knit apparel
itemsproducts areinventoriedproduced based on forecasts to permit quick shipment and to level production schedules. Special knit apparelitemsproducts andcustomerprivate label knit apparel styles are generallyaremade only to order. Some customers place multi-month orders and request shipment at their discretion. The Company offers same-day shipping and uses third party carriers to ship products to its customers.Delta
Apparel'sApparel’s sales reflect some seasonality, with sales during the first and fourth fiscal quarters generally being the highest, and sales during the second fiscal quarter generally being the lowest. The apparel industry is characterized by rapid shifts in fashion, consumer demand and competitive pressures, resulting in both price and demand volatility. The demand for any particular product varies from time to time based largely upon changes in consumer preferences and general economic conditions affecting the apparel industry, such as consumer expenditures for non-durable goods.ORDER BACKLOG
Delta Apparel’s order backlog at June 29, 2002 was $9.4 million, a $0.1 million decrease from the $9.5 million order backlog at June 30, 2001. As a growing percentage of the Company’s goods are sold on an immediate shipment basis, Delta Apparel believes that backlog order levels no longer give a general indication of future sales.
MANUFACTURING
As a vertically integrated operation, the Company converts raw fibers into finished apparel utilizing company-owned and leased
facilities, as well asfacilities. When demand exceeds production capacity or when it is cost effective to do so, the Company uses outside contractors and general suppliers forspinning, knitting, dyeing and finishing, and cuttingtextile and sewingoperations.production.Delta Apparel spins the majority of its yarn at its modern facility in Edgefield, South
Carolina, withCarolina. During fiscal year 2002, theremainder being purchased from outside vendors. The business knits, dyesCompany knit, dyed, finished andfinishes, and cuts the majoritycut almost all of its fabric in a company-owned plant in Maiden, North Carolina. InorderApril 2002, the Company purchased an additional textile facility in Fayette, Alabama. This facility is expected toexpand itsadd an additional 25% to 35% to textile production capacity for the Company during fiscal year 2003. Delta Apparelhas established an arrangement with a third party textile manufacturer under which the manufacturer will supply textile fabrics to Delta Apparel. Delta Apparelcurrently sews most of its garments in two leased facilities in San Pedro Sula, Honduras anda small part of its production at a company-owned plant in Georgia. Delta Apparel also uses outside sewing contractors when demand exceeds internal production capacity or it is cost-effective to do so. Approximately 36% of Delta Apparel's current sewing requirements are satisfied by outside contractors. All products are distributed from Delta Apparel's distribution center in Tennessee. During the last five years, Delta Apparel has opened its two Honduras plants and closed five sewing plants in the United States. Delta Apparel is currently establishing aone leasedsewingfacility inMexico whichCampeche, Mexico. At theCompany expects will commence production by the end of calendar year 2000. At2002, 2001 and 20001999, and 1998fiscal year ends, DeltaApparel'sApparel’s long-lived assets in Honduras and Mexico collectively comprised15.6%7.7%,6.6%7.6%, and 4.9%, respectively, of DeltaApparel'sApparel’s total net property, plant and equipment. Approximately 22% of DeltaApparel'sApparel’s fiscal 2002 sewing requirements were satisfied by outside contractors located in the Caribbean basin. During fiscal 2003, the Company expects the Mexican sewing facility to utilize the increased production from the Fayette facility. Outside sewing contractors will provide approximately 15% to 25% of the Company’s total sewing needs for fiscal 2003. Delta Apparel has distribution centers located in Knoxville, Tennessee and Buena Park, California. During fiscal 2003, the Company expects to open an additional distribution center in the Southeast to expand its 24 to 48 hour delivery capability to a new group of customers.3
RAW MATERIALS
Delta Apparel’s principal raw material is
cotton. Cottoncotton, which is acquired from several suppliers. DeltaApparel'sApparel’s average price per pound of cotton purchased and consumed (including freight and carrying cost) was $.581, $.539, and $.601 in fiscalyearyears 2002, 2001 and 2000,$.678 in fiscal year 1999, and $.817 in fiscal year 1998.respectively. In fiscalyear 20012003 Delta Apparel expects to use over4041 million pounds of cotton in its manufacture of yarn. Delta Apparel has contracted to purchaseapproximately 91%100% and fixed the price on approximately46%90% of its expected cotton requirements for fiscalyear 2001.2003. The percentage of its cotton requirements that Delta Apparel fixes each year varies depending upon its forecast of future cotton prices. Current cotton market prices are at relatively low levels. Delta Apparel believes that recent cotton prices have enabled it to contract for cotton at prices that will permit it to be competitive with other companies in the United States apparel industry when the cotton purchased for future use is put into production. To the extent that cotton prices decrease before Delta Apparel uses these future purchases or to the extent that cotton prices increase and Delta Apparel has not provided for its requirements with fixed price contracts, the Company could be materially and adversely affected, as there can be no assurance that it would be able to pass along its own relatively higher costs to its customers.In addition, to the extent that cotton prices increase and Delta Apparel has not provided for its requirements with fixed price contracts, Delta Apparel may be materially and adversely affected, as there can be no assurance that it would be able to pass along these increased costs to its customers. No customer accounted for more than 10% of Delta Apparel's sales in fiscal year 2000, 1999 or 1998. Part of Delta Apparel's strategy is not to become dependent on any particular customer. Many customers place multi-month orders, but request shipment at their discretion. Third party carriers are used to ship products to Delta Apparel's customers. ORDER BACKLOG Delta Apparel's order backlog at July 1, 2000 was $14.3 million, a $10.2 million decrease from the $24.5 million order backlog at July 3, 1999. In the third quarter of fiscal 1999, as a result of excessive inventory quantities, Delta Apparel began offering special pricing as part of Delta Apparel's inventory reduction plan. This caused the July 3, 1999 order backlog to be unusually high and to increase significantly over the June 27, 1998 backlog amount. Due to the lower average inventory levels during fiscal 2000, these special pricing allowances were not given, thereby causing the order backlog at July 1, 2000 to be significantly less than at July 3, 1999. Delta Apparel believes that backlog orders can give a general indication of future sales, although a growing percentage of the Company's business is sold on an at once shipment basis to catalog customers. 3BUSINESS STRATEGY
Delta
Apparel's strategyApparel’s mission is toprovidegrow sales and increase earnings by providing its customers with the best valueto its customerswith respect to the products it manufactures.ThisSet forth below are key components of the Company’s current business strategyincludes the following components: -Consistently produceto pursue this objective:MAINTAIN LOW-COST VERTICALLY-INTEGRATED MANUFACTURING OPERATIONS. The Company is a vertically integrated manufacturer that spins, knits, bleaches, dyes, finishes, cuts and sews its products at its manufacturing facilities. The Company believes this reduces costs, allows for efficient production and provides for consistent, high quality products.
-ProvideDelta Apparel continues to use its automated textile manufacturing facilities in the United States, but has moved all its sewing operations offshore to take advantage of the favorable wage differentials. In April 2002, the Company purchased an additional textile facility in Fayette, Alabama. This facility is expected to add an additional 25% to 35% to textile production capacity for the Company during fiscal year 2003. During fiscal 2003, the Company expects that the Mexican sewing facility will utilize the increased production from the Fayette facility.PROVIDE EXCELLENT CUSTOMER SERVICE. The Company believes that providing excellent customer service with respect to rapid and accurate delivery,
a close tie in to the customers'customer inventory needs and ordermonitoring. -Shiftmonitoring is essential. In June 2001, the Company opened its West Coast Sales and Distribution Center in order to provide better service to its West Coast customers. Delta Apparel can now cost-effectively offer delivery of its products to approximately 90% of the continental United States population in one to two days under normal conditions. During fiscal 2003, the Company expects to open an additional distribution center in the Southeast to expand its 24 to 48 hour delivery capability to a new group of customers. Delta Apparel also offers a customer-friendly Internet site. The site provides real-time information in an easy to use format so customers will have the information they need to run their business more efficiently. Customers can now track the status of their order, receive emails confirming the shipment of their order and check the availability of inventory prior to placing an order. The Company believes that its knowledgeable phone-based customer service representatives, along with the Internet site, make its total customer service offering among the most advanced and convenient in the industry.BALANCE THE CUSTOMER AND PRODUCT MIX. The Company believes that a balanced mix of customers and products is essential to its success. Although distributors are important to the business as they typically place larger orders and maintain higher inventory levels, margins are typically 4 to 10 percentage points higher on direct and private label sales. During the recent fiscal year, the Company continued to focus its sales efforts on direct customers, increasing the sales to direct customers from 54% of its total sales in fiscal 2001 to 70% in fiscal 2002. In addition, Delta Apparel is focusing on shifting the product mix to higher margin items.
-Take advantageThis includes manufacturing more colored products and expanding the product line into more specialized T-shirts. During fiscal year 2001, the Company significantly increased its sales ofbeing largely a totally vertical producercolored products from 46% of catalog sales in fiscal 2000 toreduce costs, plan efficient production, implement exacting controls57% in fiscal 2001 andprovide consistent products. -Usecontinued to increase itsHonduran facilitiessales of colored products tomanufacture most58% ofits product, taking advantage of the favorable wage differential offered by that country. -Establish a Mexican sewing plant to take advantage of the favorable wage differential offered by that country and the benefits offered by NAFTA. -Use its Georgia plant to produce goods needed on a quick turnaround basis. -Increase the focus on a relatively small range of core basic products. -Have a balanced mix of customers. -Continuecatalog sales in fiscal 2002.FOCUS ON INVENTORY AND ACCOUNTS RECEIVABLE. Delta Apparel continues to focus on the management of inventory and accounts receivable in order to minimize its overall risk and capital investment.
-Increase production capacityDuring fiscal year 2002, the Company continued tothe extent economically feasible. Delta Apparel's management believes that this strategyshorten its average payment terms to customers and to improve its aging of receivables, thereby reducing its days sales outstanding. The Company willtake advantage of the following market trends: -Increasing coordination, including electronic data interchange, between producers and retailers. -Compression of the supply chain, with retailers monitoring sales on a weekly or daily basis, carrying less inventory, demanding quicker response times from producers and requiring producerscontinue tokeep the retailers' inventories stocked for quick delivery. -Because of the retailers'focus oncost reductionits inventory requirements andenhancing narrow margins, virtually all productive capacity has gone off shore. -Continued trendmay begin increasing current inventory levels in order to support themarket toward more casual clothes.growing business.4
COMPETITION
The cyclical nature of the apparel industry, characterized by rapid shifts in fashion, consumer demand and competitive pressures, results in both price and demand volatility. The demand for any particular product varies from time to time based largely upon changes in consumer preferences and general economic conditions affecting the apparel industry, such as consumer expenditures for non-durable goods. The apparel industry is also cyclical because the supply of particular products changes as competitors enter or leave the market.Delta Apparel competes with
a number ofmany United States and Canadian branded and private label manufacturers of knitapparel. Manyapparel, some ofthese companieswhich are larger in size andsomehave greater financial resources than Delta Apparel.Some of Delta Apparel's competitors offer their product on consignment (wherebyCompetition in thecustomeractivewear apparel industry isnot billed until the customer resells the product) or with extended payment terms (90 to 180 days) to customers in some market segments. Delta Apparel's current strategy does not include offering similar terms to its customers. Delta Apparel believes that the long-term benefits of its approach will outweigh any short-term loss of business that it may suffer as result of this practice by some of its competitors. Approximately three-quarters of the United States market sales of knit apparel are made by three major knit apparel manufacturers which are Delta Apparel's primary competitors. Based on mill dozens sold in 1998, Delta Apparel has an approximate 5% share of the market 4for decorated T-shirts for wholesalers and screen printers, which is up from 4% in 1996 and makes it a second tier supplier to the market. In fiscal year 2000, approximately 97% of Delta Apparel's sales were of T-shirts, 2% of Delta Apparel's sales were of fleece sweatshirts and 1% of Delta Apparel's sales were of other products. The principal competitive factors aregenerally based upon price, service, delivery time, quality and flexibility, with the relative importance of each factor depending upon the needs of particular customers and the specific product offering. DeltaApparel's products face considerable price pressure. Delta Apparel'sApparel’s strategy is to provide the best value to its customers. Favorable competitive aspects of DeltaApparel'sApparel’s business are the relatively high quality of its products, its state of the art information systemsits relatively low distributionandselling and general administrative costs and the business'its flexibility and process control, which leads to product consistency.These advantages derive fromDeltaApparel being largely a totally vertical producer, its focus on service and quick order turn around times and its relatively low distribution costs. Delta Apparel'sApparel’s primary relative competitive disadvantage is that itsDelta Apparelbrandname isnames are not as well known as the brand names of its largest competitors, such asFruit-of-the-Loom(R)Gildan®,Hanes(R)Hanes® andRussell(R)Russell®.EMPLOYEES
At
July 1, 2000, Delta ApparelJune 29, 2002, the Company, including its offshore subsidiaries, had approximately2,2003,100 full time employees. DeltaApparel'sApparel’s employees are not represented byunions. Delta Apparelunions and the Company believes that its relations with its employees are good.ENVIRONMENTAL AND REGULATORY MATTERS
Delta Apparel is subject to various federal, state and local environmental laws and regulations concerning, among other things, wastewater discharges, storm water flows, air emissions
ozone depletionand solid waste disposal. DeltaApparel'sApparel’s plants generate very small quantities of hazardous waste, which are either recycled or disposed of off-site. Most of its plants are required to possess one or more discharge permits.On
August 25, 2000, Delta Apparel'sMay 27, 2002, the Company received a renewal of its National Pollution Discharge Elimination System (“NPDES”) permit from the North Carolina Department of Environment and Natural Resources, Division of Water Quality (the “DWQ”) for its Maiden, North Carolina textileplant receivedplant. Among other things, the new permit requires the Company to reduce its effluent (waste discharge) color to specified color concentration limits. The color concentration limits are gradually lowered over time (one limit for the first 12 months, and aNoticelower limit in the next 12 months, and a lower limit thereafter). The Company believes that the DWQ exceeded its authority and jurisdiction and acted arbitrarily in imposing this requirement on the Company under the new permit and on July 23, 2002 filed an appeal with the Office ofViolation and AssessmentAdministrative Hearings ofCivil Penalty amounting to $2.1 thousand for violationCatawba County, North Carolina. The Company expects that the appeal will be heard before an administrative law judge (an “ALJ”) no earlier than November 2002. Although the decision of the11% chronic toxicity effluent discharge limitation. A review ofALJ is not binding on thefacility's toxicity self-monitoring data from March, 2000 indicated a 4.1% chronic value, which is belowDWQ or the11% limitation. Delta Apparel has respondedCompany, the Company can further appeal an unfavorable decision to theviolation by reformulatingDWQ decision-maker, and if necessary, to thehigh salt dye formulas. This has brought the Company within the permitted levels. Delta Apparel believes that it is in compliance in all material respects with all other federal, state, and local environmental statutes and requirements. Delta Apparel's Maiden,North Carolinatextile plant has received complaints from downstream owners aboutSuperior Court.There can be no assurance that the
color of its effluent discharge intoCompany’s appeal will result in ariver's tributary. Although Delta Apparel's current NPDES permit, which expireschange inJuly 2001,the conditions imposed by the new permit. The Company does notregulate the colorcurrently have an estimate ofeffluent, some additional regulatory control of color is likely to occur in the future. Delta Apparel believes that it can reduce the color of its effluent discharge at an estimated cost of approximately $200,000 to $300,000 per year. As a result of environmental rules relating to waste water discharge, any significant increase in production capacity of the Maiden, North Carolina plant would require significant expenditures for environmental studies and, depending on the results of those studies, possible significant other expenditures. The plant holds a permit to discharge 1 million gallons of waste water per day. As a result of process improvements, Delta Apparel has reducedthe amount ofwaste water discharge from 950,000 gallonsadditional annual expenses, if any, that the Company may incur in the future in order toa current levelcomply with the new permit, and there can be no assurance that the cost ofapproximately 825,000 gallons per day.compliance will not be material to the financial condition of the Company.Delta Apparel incurs capital and other expenditures
ineach year that are aimed at achieving compliance with current and future environmental standards. Generally, the environmental rules applicable to Delta Apparel are becoming increasingly stringent. Delta Apparel does not expect that the amount of these expenditures in the future will have a material adverse effect on its operations, financial condition or liquidity. There can be no assurance, however, that future changes in federal, state, or local regulations, interpretations of existing regulations or the discovery of currently unknown problems or conditions will not require substantial additional expenditures. Similarly, the extent of DeltaApparel'sApparel’s liability, if any, for past failures to comply with laws, regulations and permits applicable to its operations cannot be determined.RISK FACTORS
PRIOR TO FISCAL YEAR 2000, DELTA APPAREL HAD SIGNIFICANT OPERATING LOSSES AND USED SIGNIFICANT AMOUNTSAVAILABILITY OF
CASH IN ITS OPERATIONS AND THESE LOSSES AND THIS USE OF CASH MAY RECUR. Delta Apparel had operating losses of $9.7 million in the fiscal year ended July 3, 1999 and $17.8 million in the fiscal year ended June 27, 1998. Delta Apparel had operating income of $12.2 million in the fiscal year ended July 1, 2000. Net cash used in operating activities by Delta Apparel was $6.8 million in the 1999 fiscal year and $12.6 million in the 1998 fiscal year. During the 2000 fiscal year, Delta Apparel generated $16.5 million of cash from operations. Delta ApparelCASH.The Company believes thatthe primary factors that have contributed to its recent positive operating results have been: -Its use of its Honduras plants and sewing contractors with facilities in the Caribbean basin to satisfy its sewing needs; -Its effective utilization of the new information systems that it has implemented; 5-Efficiencies gained from the modernization of its textile manufacturing operation in Maiden, North Carolina; -The increased proportion of its sales to T-shirt screen printers and sales to private label accounts; and -The closing down by some of its competitors of manufacturing capacity. The benefits that these factors have provided to Delta Apparel may decline as its competitors make similar or otheradverse changesto their operations. Such a changein competitive conditions, coupled with the long-term trend of declining prices for DeltaApparel'sApparel’s products, may cause Delta Apparel to incur operating losses or to use significant amounts of cash in its operations. Significant operating losses or significant usesby Delta Apparelof cash in its operations could causeDelta Apparelthe Company to be unable to pay its debts as they become due and to default on its credit facility, which would have an adverse effect on the value of the Delta Apparel shares.PRIOR TO FISCAL YEAR5
In mid-May 2000,
DELTA APPAREL'S NEEDS FOR CASH WERE GENERALLY MET BY ADVANCES FROM DELTA WOODSIDE. SINCE MID-MAY 2000, DELTA APPAREL HAS BEEN ENTIRELY DEPENDENT ON ITS OWN OPERATIONS AND THIRD PARTY LENDERS TO OBTAIN NEEDED FINANCING. Prior to fiscal year 2000, when theDelta Appareloperations needed funds for operations or capital expenditures, it received those funds from Delta Woodside. Duringentered into a credit agreement with a lending institution, under which thetwo fiscal years ended July 3, 1999,lender provided Delta Apparelused an aggregate of $25.5with a $10 millionof cash provided by Delta Woodside (of which $16.0term loan and a 3-year $25 millionwas used to pay interest to Delta Woodside on the affiliated debt owed by the Delta Apparel Company division). As a result of the Delta Apparel Distribution and related transactions, Delta Apparel can no longer look to Delta Woodside to satisfy its cash flow needs. DELTA APPAREL'S REVOLVING CREDIT FACILITY MAY NOT BE AVAILABLE OR SUFFICIENT TO SATISFY DELTA APPAREL'S NEEDS FOR WORKING CAPITAL. Delta Apparel expects that its peak borrowing needs will be in its third and fourth fiscal quarters and that during those quarters it will be in its lowest cash position or it could possibly be required to draw against the revolver loan. Delta Apparel'srevolving credit facility. The Company’s ability to borrow under its$25 millionrevolving credit facilitywill beis based upon, and thereby limited by, the amounts of its accounts receivable and inventory. Any material deterioration in DeltaApparel'sApparel’s financial resultsof operationscouldtherefore, result in a reduction in Delta Apparel'sreduce the Company’s borrowing base, which could causeDelta Apparelthe Company to lose its ability to borrow additional amounts under its revolving credit facility or to issue additional letters of credit to suppliers. In such a circumstance, the borrowing availability under DeltaApparel'sApparel’s credit facility may not be sufficient forDelta Apparel's workingthe Company’s capital needs.DEMAND FOR AND PRICING OF DELTA APPAREL'S PRODUCTS ARE LARGELY OUT OF DELTA APPAREL'S CONTROL. EVEN THOUGH DELTA APPAREL'S STRATEGY IS TO BEDelta Apparel’s credit agreement contains covenants that restrict, among other things, the ability of Delta Apparel and its subsidiaries to incur indebtedness, create liens, consolidate, merge, sell assets or make investments. The credit agreement also contains customary representations and warranties, funding conditions and events of default. A
LOW COST PRODUCER WITH A REPUTATION FOR QUALITY SERVICE, THIS STRATEGY MAY NOT BE SUFFICIENT TO OFFSET DETRIMENTAL TRENDS IN DEMAND AND PRICING FOR DELTA APPAREL'S PRODUCTS.breach of one or more covenants or any other event of default under the credit agreement could result in an acceleration of the Company’s obligations under that agreement, in the foreclosure on any assets subject to liens in favor of the credit agreement’s lender and in the inability of Delta Apparel to borrow additional amounts under the credit agreement.PRICING.Prices for
Delta Apparel'sthe Company’s products have generally been dropping over the last several years, even though demand for DeltaApparel'sApparel’s products has increased since fiscalyear1998. The price declines have resulted from factors largely outside DeltaApparel'sApparel’s control, such asexcess supply capacity,theindustry'sindustry’s transfer of manufacturing out of the United States, excess supply capacity, and declining raw material prices. In addition, some of Delta Apparel’s competitors are experiencing significant financial difficulties. These difficulties may lead these competitors to sell substantial amounts of goods at prices against which Delta Apparel cannot effectively compete. Demand for DeltaApparel'sApparel’s products is dependent on the general demand for T-shirts andfleece goods andthe availability of alternative sources of supply.Delta Apparel'sThe Company’s strategy in this market environment is to be a low cost producer and to differentiate itself by providing quality service to its customers. Even if this strategy is successful, its results may be offset bylargereductions in demand or price declines.DELTA APPAREL PURCHASES SIGNIFICANT AMOUNTS OF COTTON IN ITS BUSINESS. AS A RESULT, EVEN SMALL INCREASES IN THE PRICE OF COTTON CAN SIGNIFICANTLY INCREASE DELTA APPAREL'S PRODUCT COSTS. Delta Apparel's principal raw material is cotton. In fiscal year 2001CYCLICAL RESULTS.Delta Apparel
expectsand the U.S. apparel industry are sensitive touse more than 40 million poundsthe business cycle ofcottonthe national economy. Moreover, the popularity, supply and demand for particular apparel products can change significantly from year to year based on prevailing fashion trends and other factors. Reflecting the cyclical nature of the apparel industry, many apparel producers tend to increase capacity during years inits manufacture of yarn. Accordingly,which sales are strong. These increases in capacity tend to accelerate aone cent per pound increasegeneral economic downturn in theaverage price of cotton during that period would increase Delta Apparel's product costs by more than $400,000. The recent improvementsapparel markets when demand weakens. These factors have historically contributed to fluctuations in DeltaApparel'sApparel’s results ofoperations have been due in part to the fact that cotton prices have declined over the last few years. Delta Apparel has contracts that fix the prices it pays for cotton for a significant portion of its short-term requirements, butoperations. When thesecontracts provide no price protectionfluctuations occur in thelonger term. If cotton prices were to increase,future, Delta Apparel maynotbeable to increase the prices of its products to offset the corresponding increases in its product costs. DELTA APPAREL'S ABILITY TO EXPAND PRODUCTION SIGNIFICANTLY IS LIMITED. Delta Apparel's ability to increase production is constrained primarily by the capacity of its textile manufacturing operation. The ability of Delta Apparel to acquire fabric from outside sources is limited, and relatively significant expenditures would be required to expand the productive capacity of its Maiden, North Carolina textile plant. 6DELTA APPAREL FACES INTENSE COMPETITION IN ITS MARKETS, AND DELTA APPAREL'S FINANCIAL RESOURCES ARE NOT AS GREAT AS SEVERAL OF ITS COMPETITORS. The domestic apparel industry is highly competitive. In part because there are low economic barriers to entry into the apparel manufacturing business, a large number of domestic and foreign manufacturers supply apparel into the United States market. Approximately three-quarters of the United States market sales of knit apparel are made by three major knit apparel manufacturers that are Delta Apparel's primary competitors. These primary competitors have brand names, such as Fruit-of-the-Loom(R), Hanes(R) and Russell(R), that are far better known than the Delta Apparel brand name. Based on mill dozens sold in 1998, Delta Apparel has an approximate 5% share of the market for decorated T-shirts for wholesalers and screen printers, which makes it a second tier supplier to the market. Some of Delta Apparel's competitors have substantially greater financial, marketing, personnel and other resources than does Delta Apparel. This may enable Delta Apparel's competitorsunable to competemore aggressively than can Delta Apparelsuccessfully inpricing, marketing and other respects, to react more quickly to market trends and to better weather market downturns. THE FINANCIAL DIFFICULTIES OF SOME OF DELTA APPAREL'S COMPETITORS IS CURRENTLY CREATING CONSIDERABLE UNCERTAINTY IN DELTA APPAREL'S MARKETS. Currently, some of Delta Apparel's competitors are experiencing significant financial difficulties. These difficulties may lead these competitors to sell substantial amounts of goods at prices against which Delta Apparel cannot effectively compete. THERE MAY BE LITTLE INSTITUTIONAL INTEREST, RESEARCH COVERAGE OR TRADING VOLUME IN THE DELTA APPAREL SHARES BECAUSE OF DELTA APPAREL'S SIZE. IN ADDITION, A LARGE PERCENTAGE OF THE OUTSTANDING DELTA APPAREL SHARES ARE HELD BY A FEW INSTITUTIONAL INVESTORS WHO ARE FREE TO SELL THEIR DELTA APPAREL SHARES AT ANY TIME. THESE FACTORS COULD HAVE A MAJOR DEPRESSIVE EFFECT ON THEthe industry downturn.MARKET PRICE OF
THEDELTA APPARELSHARES FOR AN INDETERMINATE PERIOD OF TIME.SHARES.Various investment banking firms have informedDelta Apparelthe Company that public companies with relatively small market capitalizations have difficulty generating institutional interest, research coverage or tradingvolume, whichvolume. This illiquidity can translate into price discounts as compared to industry peers or to theshares'shares’ inherent value. Delta Apparel believes that the marketwill perceiveperceives it to have a relatively small market capitalization.In addition, some of Delta Woodside's stockholders who receive Delta Apparel shares in the Delta Apparel Distribution may wish to dispose of those shares because they do not meet the stockholders' investment objectives regardless of the shares' value or prospects.Moreover, the financial difficulties of other companies in DeltaApparel'sApparel’s industry are likely to have a depressive effect on the market for the Delta Apparel shares.Coupled with Delta Apparel's prior history of operating losses, theseThese factors could lead to DeltaApparel'sApparel’s shares trading at prices that are significantly lower thanDelta Apparel'sthe Company’s estimate of their inherent value.As of
September 20, 2000,August 12, 2002, Delta Apparel had outstandingapproximately 2,411,6432,019,151 shares of commonstock. Delta Apparelstock (prior to adjustment to reflect the 2-for-1 stock split effective as of September 20, 2002). The Company believes that approximately67.8%81.1% of this stock is beneficially owned by persons who beneficially own more than 5% of the outstanding shares of Delta Apparel common stock and related individuals, and that of this, approximately29.2%45.5% of the outstanding stock is beneficially owned by institutionalinvestors.investors who own more than 5% of the outstanding shares. Sales of substantial amounts of Delta Apparel common stock in the public market by any of these large holders could adversely affect the market price of the common stock.PRINCIPAL STOCKHOLDERS EXERT SUBSTANTIAL INFLUENCE.As of August 12, 2002, two members of Delta Apparel’s board of directors and related individuals had the voting power of approximately 29.3% of the outstanding shares of Delta Apparel common stock. These individuals will exert substantial influence with respect to all matters submitted to a vote of stockholders, including the election of the Delta Apparel directors.
POLITICAL AND ECONOMIC UNCERTAINTY IN HONDURAS
COULD ADVERSELY AFFECT DELTA APPAREL.AND MEXICO.Delta Apparel has two company-operated sewing facilitieslocatedinHonduras. TheHonduras and one company-operated sewing facility in Mexico. If the Honduran or Mexican labormarket has recently tightened, which has hadmarkets tighten, it could have some adverse effects onmostthe industries located inHonduras.the applicable country. In addition,Delta Apparelthe Company might be adversely affected if economic or legal changes occurin Hondurasthat affect the way in which Delta Apparel conducts its business inthat country.these countries. For example, a growing economy could lower unemployment which could increase wage rates or make it difficult to retain employees or employ enough people to meet demand. The government could also decide to add additional holidays or change employment law increasingDelta Apparel'sthe Company’s costs to produce.DELTA APPAREL'S RESULTS COULD BE ADVERSELY AFFECTED BYDomestic unrest or political instability in either of these countries could also disrupt Delta Apparel’s operations.6
U.S. TRADE REGULATIONS.Delta
Apparel'sApparel’s products are subject to foreign competition, which in the past has been faced with significant U.S. government import restrictions. Foreign producers of apparel often have significant labor cost advantages. Given the number of these foreign producers, the substantial elimination of import protections that protect domestic apparel producers could materially adversely affect DeltaApparel'sApparel’s business. The extent of import protection afforded to domestic apparel producers has been, and is likely to remain, subject to considerable political considerations.The North American Free Trade Agreement
(which this document refers to as "NAFTA")or “NAFTA” became effective on January 1, 1994 and has created a free-trade zone among Canada, Mexico and the United States. NAFTA contains a rule of origin requirement that products be produced in one of the three countries in order to benefit from the agreement. NAFTA has phased out all trade restrictions and tariffs among the three countries on apparel products competitive with those of Delta Apparel.Because most of Delta Apparel's internal production of apparel currently occurs outsideDuring fiscal 2001, the Company completed its sewing expansion into Mexico in order to take advantage of the NAFTAterritory,benefits. Subsequent repeal or alteration of NAFTAmaycould seriously adversely affectDelta Apparel so long as Delta Apparel has manufacturing facilities outsidethe Company’s results ofthe three NAFTA countries. 7Delta Apparel, along with all of its major competition, makes use of provisions of the tariff code that are commonly referred to as Section 807 and Section 807A. Section 807 provides for the duty-free treatment of United States origin components used in the assembly of imported articles.operations.The
result is that duty is assessed only on the value of any foreign components that may be present and the labor cost incurred offshore in the assembly of apparel using United States origin fabric components. Pursuant to Section 807A, apparel articles assembled in aCaribbeancountry (such as Honduras), in which all fabric components have been wholly formed and cut in the United States (such as at Delta Apparel's Maiden plant in North Carolina), are subject to preferential quotas with respect to access into the United States for such qualifying apparel, in addition to the significant tariff reduction pursuant to Section 807. Apparel not meeting the criteria of Section 807, Section 807A or NAFTA is subject to quotas and/or relatively higher tariffs, except as may result under theBasin Tradeand DevelopmentPartnership Actof 2000, as noted below. Delta Apparel believes that, if Section 807 or Section 807A or any similar program were repealed or adversely altered in whole or in part, Delta Apparel would be at a serious competitive disadvantage relative to textile and apparel manufacturers in the rest of the world seeking to enter the United States market. The Trade and Development Act of 2000(often referred to as the"CBI“CBI ParityBill"Bill”)will becomebecame effective on October 1, 2000.Delta Apparel believes that theThe provisions of the CBI Parity Billwillhave the following effects most relevant toitsthe apparel business:-Apparel assembled in most Caribbean nations (such as Honduras) from fabric formed and cut in the United States of U.S. yarn can enter the United States duty-free; -Apparel cut and sewn in most Caribbean nations from fabric formed in the United States of U.S. yarn can enter the United States duty-free so long as it is sewn with U.S. manufactured thread; and -Certain limits of apparel made from fabric formed in certain Caribbean nations of U.S. yarn and cut and sewn in those nations can enter the United States duty-free.
• | Apparel assembled in most Caribbean nations (such as Honduras) from fabric formed and cut in the United States of U.S. yarn can enter the United States duty-free; | ||
• | Apparel cut and sewn in most Caribbean nations from fabric formed in the United States of U.S. yarn can enter the United States duty-free as long as it is sewn with U.S. manufactured thread; and | ||
• | Certain limits of apparel made from fabric formed in certain Caribbean nations of U.S. yarn and cut and sewn in those nations can enter the United States duty-free. |
Apparel entering the United States under any of these three provisions willis not
be subject to any quotas that may exist for that specific category of goods. Delta Apparel believes that the CBI Parity Bill will givegives it a competitive advantage relative to apparel manufacturers outside of the Caribbean and improveimproves its competitive position relative to apparel manufacturers inside the non-U.S.P
NAFTAnon-NAFTA countries. Subsequent repeal or adverse alteration of the CBI Parity Bill could put Delta Apparel at a serious competitive disadvantage relative to such manufacturers.
The World Trade Organization (which this document refers to as the "WTO")or “WTO”, a new multilateral trade organization, was formed in January 1995 and is the successor to the General Agreement on Tariffs and Trade.Trade or “GATT”. This new multilateral trade organization has set forth mechanisms by which world trade in clothing is being progressively liberalized by phasing-out quotas and reducing duties over a period of time that began in January of 1995. As it implements the WTO mechanisms, the U.S. government is negotiating bilateral trade agreements with developing countries (which are generally exporters of textile and apparel products) that are members of the WTO to get them to reduce their tariffs on imports of textiles and apparel in exchange for reductions by the United States in tariffs on imports of textiles and apparel. The elimination of quotas and the reduction of tariffs under the WTO may result in increased imports of certain apparel products into North America. These factors could make Delta Apparel'sApparel’s products less competitive against low cost imports from developing countries.
DELTA APPAREL IS DEPENDENT ON ITS TRADEMARKS.
ENVIRONMENTAL RULES.Delta Apparel relies on the strength of its trademarks. Approximately 75% of
Delta Apparel's products are currently sold under the Delta Apparel(R) brand.
Delta Apparel has incurred legal costs in the past to establish and protect its
trademarks, but this cost has not been significant. Delta Apparel may in the
future be required to expend resources to protect these trademarks. The loss or
limitation of the exclusive right to use its trademarks could adversely affect
Delta Apparel's sales and results of operations.
A LOSS OF KEY MANAGEMENT PERSONNEL, PARTICULARLY ROBERT W. HUMPHREYS, COULD
ADVERSELY AFFECT DELTA APPAREL.
Delta Apparel's success depends upon the talents and efforts of a small number
of key management personnel, particularly Robert W. Humphreys (President and
Chief Executive Officer of Delta Apparel). The loss or interruption of the
services of these executives could have a material adverse effect on Delta
Apparel. Delta Apparel has no assurance that it would be able to find
replacements for its key management with equivalent skills or experience in a
timely manner or at all.
DELTA APPAREL'S BUSINESS IS SEASONAL.
Historically, Delta Apparel's business has been seasonal, with peak sales
occurring in the first and fourth quarters of its fiscal year. In response to
this seasonality, Delta Apparel generally increases its inventory levels, and
thereby has higher working capital needs, during the third and fourth quarters
of its fiscal year to meet customer demands for the peak first and fourth fiscal
quarter seasons.
DELTA APPAREL'S RESULTS WILL LIKELY BE CYCLICAL.
Delta Apparel and the U.S. apparel industry are sensitive to the business cycle
of the national economy. Moreover, the popularity, supply and demand for
particular apparel products can change significantly from year to year based on
prevailing fashion trends and other factors.
8
Reflecting the cyclical nature of the apparel industry, many apparel producers
tend to increase capacity during years in which sales are strong. These
increases in capacity tend to accelerate a general economic downturn in the
apparel markets when demand weakens.
These factors have contributed historically to fluctuations in Delta Apparel's
results of operations and these fluctuations are expected to occur in the
future. Delta Apparel may be unable to compete successfully in any industry
downturn.
DELTA APPAREL DEPENDS ON OUTSIDE PRODUCTION FOR A SIGNIFICANT PORTION OF ITS
PRODUCTION.
Delta Apparel currently sources from third party suppliers 25% to 40% of the
sewing production it requires. Any shortage of supply or significant price
increases from Delta Apparel's suppliers could adversely affect Delta Apparel's
results of operations.
DELTA APPAREL'S CREDIT AGREEMENT IMPOSES RESTRICTIONS THAT, IF BREACHED BY DELTA
APPAREL, MAY PREVENT IT FROM BORROWING UNDER ITS REVOLVING CREDIT FACILITY AND
RESULT IN THE EXERCISE OF REMEDIES BY THE CREDIT AGREEMENT LENDER.
Delta Apparel's credit agreement contains covenants that restrict, among other
things, the ability of Delta Apparel and its subsidiaries to incur indebtedness,
create liens, consolidate, merge, sell assets or make investments. The credit
agreement also contains customary representations and warranties, funding
conditions and events of default.
A breach of one or more covenants or any other event of default under the Delta
Apparel credit agreement could result in an acceleration of Delta Apparel's
obligations under that agreement, in the foreclosure on any assets subject to
liens in favor of the credit agreement's lender and in the inability of Delta
Apparel to borrow additional amounts under the credit agreement.
ENVIRONMENTAL RULES COULD ADVERSELY AFFECT DELTA APPAREL.
Delta Apparel'sApparel’s operations must meet extensive federal, state and local regulatory standards in the areas of safety, health and environmental pollution controls. In addition, there can be no assurance that future changes in federal, state or local regulations, interpretations of existing regulations or the discovery of currently unknown problems or conditions will not require substantial additional expenditures. Similarly, the extent of Delta Apparel'sApparel’s liability, if any, for past failures to comply with laws, regulations and permits applicable to its operations cannot be determined.
DELTA APPAREL MAY BE RESPONSIBLE FOR ANY
On May 27, 2002, the Company received a renewal of its National Pollution Discharge Elimination System (“NPDES”) permit from the North Carolina Department of Environment and Natural Resources, Division of Water Quality (the “DWQ”) for its Maiden, North Carolina textile plant. Among other things, the new permit requires the Company to reduce its effluent (waste discharge) color to specified color concentration limits. The color concentration limits are gradually lowered over time (one limit for the first 12 months, and a lower limit in the next 12 months, and a lower limit thereafter). The Company believes that the DWQ exceeded its authority and jurisdiction and acted arbitrarily in imposing this requirement on the Company under the new permit and on July 23, 2002 filed an appeal with the Office of Administrative Hearings of Catawba County, North Carolina. The Company expects that the appeal will be heard before an administrative law judge (an “ALJ”) no earlier than November 2002. Although the decision of the ALJ is not binding on the DWQ or the Company, the Company can further appeal an unfavorable decision to the DWQ decision-maker, and if necessary, to the North Carolina Superior Court.
There can be no assurance that the Company’s appeal will result in a change in the conditions imposed by the new permit. The Company does not currently have an estimate of the amount of additional annual expenses, if any, that the Company may incur in the future in order to comply with the new permit, and there can be no assurance that the cost of compliance will not be material to the financial condition of the Company.
7
OUTSIDE PRODUCTION.Delta Apparel has historically relied upon third party suppliers for up to 40% of its sewing production. Approximately 22% of Delta Apparel’s fiscal 2002 sewing requirements were satisfied by outside contractors located in the Caribbean basin, and the Company expects that approximately 15% to 25% of its fiscal 2003 sewing production will be satisfied by outside contractors. Any shortage of supply or significant price increases from the Company’s suppliers could adversely affect Delta Apparel’s results of operations.
HISTORICAL TAX LIABILITIES OF DELTA
WOODSIDE AND DUCK HEAD THAT DELTA WOODSIDE OR DUCK HEAD DOES NOT PAY.
LIABILITIES.Prior to the Delta Apparel Distribution,Spin-off, Delta Apparel was a member of Delta Woodside'sWoodside’s consolidated group for federal income tax purposes. Each member of a consolidated group is jointly and severally liable for the federal income tax liability of the other members of the group. After the Delta Apparel
Distribution,Spin-off, Delta Apparel, along with Delta Woodside, and Duck Head, will continue to be liable for thesethe Delta Woodside liabilities that were incurred for periods before the Spin-off.
Delta Apparel Distribution.
Delta Apparel,and Delta Woodside and Duck Head have entered into the Tax Sharing
Agreement.are parties to a tax sharing agreement. This agreement generally seeks to allocate consolidated federal income tax liabilities to Delta Woodside for all periods prior to and including the Delta Apparel Distribution.Spin-off. Under this agreement, Delta Woodside generally
retains the authority to file returns, respond to inquiries and conduct
proceedings on Delta Apparel's behalf with respect to consolidated federal
income tax returns for periods beginning before the Delta Apparel Distribution.
In addition, Delta Woodside has the authority to decide all disputes that arisearising under the Tax Sharing Agreement. These arrangements may resultagreement (other than claims in conflictsequity) shall be resolved by arbitration in accordance with the Commercial Arbitration Rules of interest among Delta Apparel, Delta Woodside and Duck Head. In addition, ifthe American Arbitration Association. If Delta Woodside does not satisfy any of its liabilities respecting any period prior to the Delta Apparel Distribution,Spin-off, Delta Apparel could be responsible for satisfying them, notwithstanding the Tax Sharing Agreement.
DELTA APPAREL'S PRINCIPAL STOCKHOLDERS WILL EXERT SUBSTANTIAL INFLUENCE.
Astax sharing agreement.
TRADEMARKS.Delta Apparel relies on the strength of September 20, 2000, two membersits trademarks. Approximately 90% of Delta Apparel's board of directorsApparel’s products are currently sold under the DELTA® and related individuals hadQUAIL HOLLOW® brands. The Company has incurred legal costs in the voting powerpast to establish and protect its trademarks, but this cost has not been significant. Delta Apparel may in Delta Woodside shares that results
in voting power with respectthe future be required to approximately 24.6%expend resources to protect these trademarks. The loss or limitation of the outstanding Delta
Apparel common stock. These individuals will exert substantial influence with
respectexclusive right to all matters submitted to a vote of stockholders, including elections
of Delta Apparel's directors.
VARIOUS RESTRICTIONS AND AGREEMENTS COULD HINDER ANY ATTEMPT BY A THIRD PERSON
TO CHANGE CONTROL OF DELTA APPAREL.
Delta Apparel has entered into a rights agreement providing for the issuance of
rights that will cause substantial dilution to any person or group of persons
that acquires 20% or more of the outstanding Delta Apparel common shares without
the rights having been redeemed by the Delta Apparel board. In addition, Delta
Apparel's articles of incorporation and bylaws and the Official Code of Georgia
contain provisions that could delay or prevent a change in control of Delta
Apparel in a transaction that is not approved byuse its board of directors. These
include provisions requiring advance notification of stockholder nominations for
director and stockholder proposals, setting forth additional factors to be
considered by the board of directors in evaluating extraordinary transactions,
prohibiting cumulative voting, limiting business combinations with stockholders
that have a significant beneficial ownership in Delta Apparel shares, and
prohibiting stockholders from calling a special meeting. Moreover, Delta
Apparel's board of directors has the authority, without further action by the
stockholders, to set the terms of and to
9
issue preferred stock. Issuing preferred stocktrademarks could adversely affect the voting
powerCompany’s sales and results of operations.
KEY MANAGEMENT.Delta Apparel’s success depends upon the talents and continued contributions of its key management, many of who would be difficult to replace. The loss or interruption of the ownersservices of these executives could have a material adverse effect on the Company’s business, financial condition and results of operations. Although the Company maintains employment agreements with certain members of key management, the Company cannot be assured that the services of such personnel will continue. Delta Apparel common stock, including the lossdoes not, however, maintain an employment agreement with Robert W. Humphreys, President and Chief Executive Officer. The Company believes its future success depends on its ability to retain and motivate its key management, its ability to integrate new members of voting
control to others.
Delta Apparel's credit agreement also provides that a "change of control", as
defined in that agreement, would be an event of defaultmanagement into its operations and includes
restrictions on the ability of Delta Apparel and its subsidiariesall personnel to pay
dividends and make share repurchases.
All of these provisions could deter or prevent an acquirer that is interested in
acquiring Delta Apparel from doing so.
work together effectively as a team.
ITEM 2. PROPERTIES
Delta Apparel'sApparel’s principal administrative, sales, and marketing operations are located in a leased facility in Duluth, Georgia. The lease is for approximately 18,600 square feet and expires in February,March 2006 and has one option to extend the lease for a five year term. The Company also has a leased sales office in New York City. The lease is for approximately 648 square feet and expires in November 2003.2002. The Company is currently negotiating new office space in New York City for its sales office. The following table provides a description of Delta Apparel'sApparel’s principal production and warehouse facilities.
Approximate | ||||||||
Square | Owned/ | |||||||
Location | Utilization | Footage | Leased | |||||
Edgefield Plant, Edgefield, SC | Yarn | 296,000 | Owned | |||||
Maiden Plant, Maiden, NC | Knit/dye/finish/cut | 305,000 | Owned | |||||
Fayette Plant, | Knit/dye/finish/cut | 135,000 | Owned | |||||
Distribution Center, Knoxville, TN | Distribution | 550,000 | Owned | |||||
Sales and Distribution | Sales and Distribution | 46,000 | Leased (1) | |||||
Honduras Plant, San Pedro Sula, Honduras | Sew | 70,000 | Leased | |||||
Honduras Plant, San Pedro Sula, Honduras | Sew | 30,000 | Leased | |||||
Mexico Plant, Campeche, Mexico | Sew | 60,000 | Leased |
(1) | The lease expires in April 2006. Delta Apparel has an option to extend the lease for an additional 5 years. | |
(2) | The lease of each of these Honduras plants expired in November 2000. Delta Apparel exercised the option to extend the leases for an additional 5 years. The first lease extensions will expire in November 2005. Delta Apparel has an option to extend each lease for an additional 5 years. |
8
(3) | The lease of the Mexico plant expires in May 2011. Delta Apparel has an option to extend the lease for an additional 5 years. |
Substantially all of Delta Apparel'sApparel’s assets are subject to liens in favor of Delta Apparel'sApparel’s credit agreement lender.
lender, including mortgages on the four owned properties listed above.
Various factors affect the relative use by Delta Apparel of its own facilities and outside contractors in the various apparel production phases. Delta ApparelThe purchase of the Fayette textile facility is currently usingexpected to increase the majorityCompany’s textile capacity by approximately 25% to 35%. The Company expects that with limited capital expenditures it can further increase the capacity of its internal production capacity.
the Fayette facility.
Delta Apparel believes that its equipment and facilities are generally adequate to allow it to remain competitive with its principal competitors.
ITEM 3. LEGAL PROCEEDINGS
In April 1994,
On May 27, 2002, the Company received a product liabilityrenewal of its National Pollution Discharge Elimination System (“NPDES”) permit from the North Carolina Department of Environment and wrongful death lawsuit, captioned Scelza,
et al. v. Caldor, Inc., et al, was filedNatural Resources, Division of Water Quality (the “DWQ”) for its Maiden, North Carolina textile plant. Among other things, the new permit requires the Company to reduce its effluent (waste discharge) color to specified color concentration limits. The color concentration limits are gradually lowered over time (one limit for the first 12 months, and a lower limit in the Supreme Courtnext 12 months, and a lower limit thereafter). The Company believes that the DWQ exceeded its authority and jurisdiction and acted arbitrarily in imposing this requirement on the Company under the new permit and on July 23, 2002 filed an appeal with the Office of Administrative Hearings of Catawba County, North Carolina. The Company expects that the appeal will be heard before an administrative law judge (an “ALJ”) no earlier than November 2002. Although the decision of the State of
New YorkALJ is not binding on the DWQ or the Company, the Company can further appeal an unfavorable decision to the DWQ decision-maker, and if necessary, to the North Carolina Superior Court.
There can be no assurance that the Company’s appeal will result in New York County, New York, against Duck Head Apparela change in the conditions imposed by the new permit. The Company Inc.,
a Tennessee corporation (which conducted the Delta Apparel Company division's
business and the Duck Head Apparel Company division's business), and other
parties. Venuedoes not currently have an estimate of the lawsuit has been changedamount of additional annual expenses, if any, that the Company may incur in the future in order to comply with the new permit, and there can be no assurance that the cost of compliance will not be material to the Supreme Courtfinancial condition of the State
of New York in Westchester County, New York. The lawsuit seeks $95 million, plus
punitive damages and attorneys' fees, for the death in January 1993 of Mrs.
Scelza allegedly caused by her bodysuit and Duck Head sweatshirt catching fire
while she used a gas range. The lawsuit was previously stayed as a result of the
bankruptcy of Caldor, Inc., a defendant in the case. The case is still in the
preliminary stages and very little discovery has been completed. Because the
allegedly defective sweatshirt would have been manufactured by the Delta Apparel
Company division (if it was a Duck Head sweatshirt), Delta Apparel has agreed in
the Distribution Agreement to indemnify Delta Woodside and Duck Head with
respect to this lawsuit. Delta Apparel believes that any reasonably likely
judgment in the lawsuit would be covered by insurance and, therefore, does not
believe that the lawsuit will have a material adverse effect on Delta Apparel's
operations, financial condition or liquidity.
Company.
All other pending litigation to which Delta Apparel is a party is ordinary routine product liability litigation or contract breach litigation incident to its business that does not depart from the normal kind of such actions. Delta
ApparelThe Company believes that none of these actions, if adversely decided, would have a material adverse effect on its results of operations, financial condition or liquidity taken as a whole.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth quarter of the Company's 2000Company’s 2002 fiscal year following the Delta Apparel Distribution.
10
PART II
ITEM 5. MARKET FOR REGISTRANT'SREGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information for Common Stock
Stock:The common stock of the Company is listed and traded on the American Stock Exchange. Exchange under the symbol DLA. The following table sets forth the range of high and low selling prices of Delta Apparel, Inc.’s Common Stock by quarter for the fiscal years ended June 29, 2002 and June 30, 2001.
Fiscal Year 2002 | Fiscal Year 2001 | |||||||||||||||
High | Low | High | Low | |||||||||||||
First Quarter * | $ | 9.78 | $ | 8.48 | $ | 5.82 | $ | 4.38 | ||||||||
Second Quarter * | 10.73 | 8.75 | 10.07 | 5.75 | ||||||||||||
Third Quarter * | 11.50 | 10.40 | 10.13 | 6.69 | ||||||||||||
Fourth Quarter * | 14.00 | 11.25 | 9.38 | 7.65 |
* | Adjusted to reflect 2-for-1 stock split effective as of September 20, 2002 |
9
The common stock was first traded on the Exchange on June 30, 2000 concurrent with the Delta Apparel Distribution.Spin-off. On that date, the high and low sales prices for Delta Apparel'sApparel’s common stock were $9.25$4.63 and $8.75, respectively.$4.38, respectively (adjusted to reflect the 2-for-1 stock split effective as of September 20, 2002). Prior to the Delta Apparel Distribution,Spin-off, Delta Apparel was a wholly-owned subsidiary of Delta Woodside and there was no established public trading market for the Company'sCompany’s shares.
Holders
Holders:At September 20, 2000,August 12, 2002, there were approximately 1,7071,343 holders of record of common stock.
Dividends
No
Dividends:On April 18, 2002, the Company adopted a quarterly dividend program of ten cents per share per quarter (prior to adjustment for the 2-for-1 stock split effective as of September 20, 2002). The Board declared the first dividend in the program of ten cents per common share of stock payable May 24, 2002 to shareholders of record as of the close of business on May 3, 2002. On August 15, 2002, the Board declared its second dividend in the program of ten cents per common share of stock payable September 16, 2002 to shareholders of record as of the close of business on September 3, 2002. The Board may terminate or amend the dividend program at any time. The Company currently expects to continue the quarterly dividend program, with dividends were declared onof five cents per share to give effect to the Company's commonSeptember 20, 2002 stock in fiscal 2000. split.
Subject to the provisions of any outstanding blank check preferred stock, the holders of Delta Apparel common stock are entitled to receive whatever dividends, if any, may be declared from time to time by the Delta Apparel board of directors in its discretion from funds legally available for that purpose. Delta Apparel'sApparel’s credit agreement permits the payment of cash dividends in an amount up to 25% of cumulative net income (excluding extraordinary or unusual non-cash items), provided that no event of default exists or would result from that payment and after the payment at least $6.0 million remains available to borrow under the revolving credit facility. Delta Apparel expects that it will from time to time considerAt June 29, 2002, the advisabilitytotal amount permitted for payment of instituting a dividend program. In general, anycash dividends under the Company’s credit agreement was $4.8 million.
Any future cash dividend payments will depend upon Delta Apparel'sApparel’s earnings, financial condition, capital requirements, compliance with loan covenants and other relevant factors.
Recent Sales
Stock Split
On August 15, 2002, the Board of Unregistered Securities
Following Delta Apparel's incorporation on December 10, 1999, Delta Apparel
issued 100 shares of its commonDirectors approved a 2-for-1 stock for aggregate consideration of $100 to its
parent corporation, Duck Head Apparel Company, Inc., a Tennessee corporation
which was an indirect wholly-owned subsidiary of Delta Woodside, in a
transaction that was not registered under the Securities Act of 1933 becausesplit of the exemption from registration provided by Section 4(2)Company’s common stock. The stock split will take the form of that Act. As part of
the Intercompany Reorganization described in "Business - Delta Apparel
distribution and related transactions", Delta Apparel's parent corporation
merged into its immediate parent corporation, which in turn merged into Delta
Woodside. On June 28, 2000, prior to the Delta Apparel Distribution, Delta
Apparel issued as a 100% stock dividend to Delta Woodside, ineach shareholder of record as of September 6, 2002, with a transaction that did
not constitutepayment date of September 20, 2002. As a sale underresult of the Securities Act of 1933,stock split, the number of additionaloutstanding shares of common stock will increase to approximately 4.0 million from approximately 2.0 million. All references in the financial statements with regard to the number of shares or average number of shares of common stock and related prices, dividends and per share amounts have been restated to reflect the 2-for-1 stock split.
Securities Authorized for Issuance under Equity Compensation Plans
Set forth in the table below is certain information about securities issuable under Delta ApparelApparel’s equity compensation plans as of June 29, 2002.
Number of securities | ||||||||||||
remaining available | ||||||||||||
for future issuance | ||||||||||||
Number of securities to | Weighted-average exercise | under equity compensation | ||||||||||
be issued upon exercise | price of outstanding | plans (excluding securities | ||||||||||
of outstanding options, | options, warrants and | reflected in column | ||||||||||
Plan Category | warrants and rights * | rights * | (a)) * | |||||||||
(a) | (b) | (c) | ||||||||||
Equity compensation plans approved by security holders | — | — | — | |||||||||
Equity compensation plans not approved by security holders | 307,870 | $ | 4.00 | 959,200 | ||||||||
Total | 307,870 | $ | 4.00 | 959,200 | ||||||||
* | Adjusted to reflect 2-for-1 stock split effective as of September 20, 2002 |
Under the Stock Option Plan, options may be granted covering up to 1,000,000 shares needed so thatof common stock. Options are granted by the Delta Apparel Distribution could be
effected.
compensation committee of the Company’s board of directors to key personnel for the purchase of the Company’s stock at prices not less than the fair market value of the shares on the dates of grant. All options granted to date under the Stock Option Plan vest in 25% increments on the first four anniversaries of the grant dates.
10
Under the Incentive Stock Award Plan, the compensation committee of the Company’s board of directors has the discretion to grant awards for up to an aggregate maximum of 400,000 common shares. The Award Plan authorizes the committee to grant to officers and other key management employees or the middle level management employees of the Company or any of its subsidiaries rights to acquire common shares at a cash purchase price of $0.01 per share. Twenty percent (20%) of each award made to date under the plan vests on each of July 31, 2000, June 30, 2001 and June 29, 2002 if the recipient remains employed by the Company and the remaining forty percent (40%) vests on the date of the Company’s first Form 10-K is filed following the third anniversary, if the recipient remains employed by the Company and certain performance criteria are met.
ITEM 6. SELECTED FINANCIAL DATA
The material under
Delta Apparel operated as a stand alone company during the heading "Selected Financial Data" in the Company's annual
report to stockholders for the yearfiscal years ended July 1, 2000 is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The material under the heading "Management's Discussion and Analysis of Results
of Operations and Financial Condition" in the Company's annual report to
stockholders for the year ended July 1, 2000 is incorporated herein by
reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Commodity Risk Sensitivity
The Company purchases cotton from approximately seven established merchants with
whom it has long standing relationships. The majority of the Company's purchases
are executed using "on-call" contracts. These on-call arrangements are used to
insure that an adequate supply of cotton is available for the Company's
requirements. Under on-call contracts, the Company agrees to purchase specific
quantities for delivery on specific dates, with pricing to be determined at a
later time. Prices are set according to prevailing prices, as reported by the
New York Cotton Exchange, at the time of the Company's election to fix specific
contracts.
Cotton on-call with a fixed price at July 1, 2000 was valued at $10.8 million,
and is scheduled for delivery between July, 2000 and December, 2000. At July 1,
2000, the Company had unpriced contracts for deliveries between September, 2000June 29, 2002 and June 30, 2001. Based onFor the prevailing
11
price at July 1, 2000, the value of these commitments are approximately $11.3
million. As commodity price aberrations are generally short-tem in nature, and
have not historically had a significant long-term impact on operating
performance, financial instruments are not used to hedge commodity price risk.
At July 1, 2000, a 10% decline in the market price of the cotton covered by
Delta Apparel's fixed price contracts would have had a negative impact of
approximately $1.1 million on the value of the contracts.
Interest Rate Sensitivity
Delta Apparel's credit agreement provides that the interest rate on outstanding
amounts owed shall bear interest at variable rates. If the amounts of
outstanding indebtedness at July 1, 2000 under the term loan were outstanding
for the entire year and the interest rate on this outstanding indebtedness were
increased by 1%, Delta Apparel's expense would be approximately $0.1 million
higher than at the current rate of interest. The actual increase in interest
expense resulting from a change in interest rates would depend on the magnitude
of the increase in rates and the average principal balance outstanding.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The material included under the heading "Independent Auditors' Report" and the
consolidated financial statements and related notes thereto included in the
Company's annual stockholders' report for the year ended July 1, 2000 are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated herein by reference from
the portions of the definitive Proxy Statement to be filed with the Securities
and Exchange Commission on orfiscal years prior to 120 days following the end of the
Company's fiscal year under the headings "Election of Directors", "Executive
Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance".
Effective September 14, 2000, Bettis C. Rainsford resigned as a director of the
Company.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference from
the portions of the definitive Proxy Statement to be filed with the Securities
and Exchange Commission on or prior to 120 days following the end of the
Company's fiscal year under the headings "Management Compensation" and
"Compensation Committee Interlocks and Insider Participation".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference from
the portion of the definitive Proxy Statement to be filed with the Securities
and Exchange Commission on or prior to 120 days following the end of the
Company's fiscal year under the heading "Stock Ownership of Principal
Shareholders and Management".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference from
the portion of the definitive Proxy Statement to be filed with the Securities
and Exchange Commission on or prior to 120 days following the end of the
Company's fiscal year under the heading "Related Party Transactions".
12
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES & REPORTS ON FORM 8-K
(a)(1) and (2) Financial Statements and Financial Statement Schedules
The following consolidated financial statements of Delta Apparel, Inc.
and subsidiaries included in the Company's annual report to
stockholders are incorporated herein by reference:
Consolidated balance sheets--July 1, 2000 and July 3, 1999.
Consolidated statements of operations--Years ended July 1,
2000, July 3, 1999 and June 27, 1998.
Consolidated statements of stockholders' equity/divisional
deficit--Years ended July 1, 2000, July 3, 1999 and June 27,
1998.
Consolidated statements of cash flows--Years ended July 1,
2000, July 3, 1999 and June 27, 1998.
Notes to consolidated financial statements.
The following consolidated financial statement schedule of Delta
Apparel, Inc. and subsidiaries is included in Item 14(d):
Schedule II -- Consolidated Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and
therefore have been omitted. Columns omitted from schedules filed have
been omitted because the information is not applicable.
(a)(3) Listing of Exhibits*
2.1 Distribution Agreement by and among Delta Woodside Industries,
Inc, DH Apparel Company, Inc. (since renamed Duck Head Apparel
Company, Inc.) and the Company (excluding schedules and
exhibits): Incorporated by reference to Exhibit 2.1 to the
Company's Form 10.
3.1 Articles of Incorporation of the Company: Incorporated by
reference to Exhibit 3.1 to the Company's Form 10.
3.2.1 Bylaws of the Company: Incorporated by reference to Exhibit
3.2.1 to the Company's Form 10.
3.2.2 Amendment to Bylaws of the Company adopted January 20, 2000:
Incorporated by reference to Exhibit 3.2.2 to the Company's
Form 10.
3.2.3 Amendment to Bylaws of the Company adopted February 17, 2000:
Incorporated by reference to Exhibit 3.2.3 to the Company's
Form 10.
3.2.4 Amendment to Bylaws of the Company adopted June 6, 2000:
Incorporated by reference to Exhibit 3.2.4 to the Company's
Form 10.
4.1 See Exhibits 3.1, 3.2.1, 3.2.2, 3.2.3, 3.2.4, 10.8.1, 10.8.2,
10.8.3, 10.8.4 and 10.8.5.
4.2 Specimen certificate for common stock, par value $0.01 per
share, of the Company: Incorporated by reference to Exhibit
4.2 to the Company's Form 10.
4.3 Shareholder Rights Agreement, dated January 27, 2000, by and
among the Company and First Union National Bank: Incorporated
by reference to Exhibit 4.3 to the Company's Form 10.
10.1 See Exhibits 2.1 and 4.3.
10.2 Tax Sharing Agreement by and among Delta Woodside Industries,
Inc., Duck Head Apparel Company, Inc. and the Company:
Incorporated by reference to Exhibit 2.2 to the Report on Form
8-K of Delta Woodside Industries, Inc. (File No. 1-10095) with
date of June 30, 2000.
10.3.1 Letter dated December 14, 1998, from Delta Woodside
Industries, Inc. to Robert W. Humphreys: Incorporated by
reference to the Form 10-Q/A of Delta Woodside Industries,
Inc. for the quarterly period ended December 26, 1998
(Commission File No. 1-10095).**
10.3.2 Letter dated April 22, 1999, from Delta Woodside Industries,
Inc. to Robert W. Humphreys: Incorporated by reference to the
Form 10-K of Delta Woodside Industries, Inc. for the fiscal year ended July 3, 1999 (Commission File No. 1-10095).**
13
10.4 Delta Apparel, Inc. 2000 Stock Option Plan, Effective as of
February 15, 2000, Amended & Restated March 15, 2000:
Incorporated by reference to Exhibit 10.4 to the Company's
Form 10.**
10.5 Delta Apparel, Inc. Incentive Stock Award Plan, Effective
February 15, 2000, Amended & Restated March 15, 2000:
Incorporated by reference to Exhibit 10.5 to the Company's
Form 10.**
10.6 Delta Apparel, Inc. Deferred Compensation Plan for Key
Managers: Incorporated by reference to Exhibit 10.6 to the
Company's Form 10.**
10.7 Form of Amendment of Certain Rights and Benefits Relating to
Stock Options and Deferred Compensation by and between Delta
Woodside Industries, Inc., the Company and certain
pre-spin-off Delta Woodside Industries, Inc. plan
participants: Incorporated by reference to Exhibit 10.7 to the
Company's Form 10.**
10.7.1 List of directors and officers of the Company who signed the
document described in Exhibit 10.7.
10.8.1 Collateral Assignment of Acquisition Agreements dated May 16,
2000 by and among DH Apparel Company, Inc., Delta Apparel,
Inc. in favor of Congress Financial Corporation (Southern):
Incorporated by reference to Exhibit 10.8.1 to the Company's
Form 10.
10.8.2 Loan and Security Agreement by and between Congress Financial
Corporation (Southern), Delta Apparel, Inc., dated May 16,
2000 (excluding exhibits and schedules): Incorporated by
reference to Exhibit 10.8.2 to the Company's Form 10.
10.8.3 Term Promissory Note in the principal amount of $10,000,000
dated May 16, 2000 by Delta Apparel, Inc. in favor of Congress
Financial Corporation (Southern): Incorporated by reference to
Exhibit 10.8.3 to the Company's Form 10.
10.8.4 Pledge and Security Agreement dated May 16, 2000 by Delta
Apparel, Inc. by and in favor of Congress Financial
Corporation (Southern) (excluding exhibits and schedules):
Incorporated by reference to Exhibit 10.8.4 to the Company's
Form 10.
10.8.5 Trademark Security Agreement dated May 16, 2000 by and between
Delta Apparel, Inc. and Congress Financial Corporation
(Southern) (excluding exhibits and schedules): Incorporated by
reference to Exhibit 10.8.5 to the Company's Form 10.
10.9 Form of Agreement Respecting Delta Woodside Industries, Inc.
Long Term Incentive Plan dated in June 2000: Incorporated by
reference to Exhibit 10.9.1 to Annual Report on Form 10-K for
fiscal year ended July 1, 2000 of Delta Woodside Industries,
Inc. (Commission File No. 1-10095.)**
13 Annual Report to Stockholders for fiscal year 2000.
21 Subsidiaries of the Company.
23 Report on Schedule for the years ended July 1, 2000, July 3,
1999 and June 27, 1998.
27 Financial Data Schedule (electronic filing only).
* All reports previously filed by the Company with the
Commission pursuant to the Securities Exchange Act, and the
rules and regulations promulgated thereunder, exhibits of
which are incorporated to this Report by reference thereto,
were filed under Commission File Number 1-15583.
** This is a management contract or compensatory plan or
arrangement.
The registrant agrees to furnish supplementally to the Securities and
Exchange Commission a copy of any omitted schedule or exhibit to any of
the above filed exhibits upon request of the Commission.
(b) Reports on Form 8-K
The Company did not file any report on Form 8-K during the fiscal
quarter ended July 1, 2000.
(c) Exhibits
The response to this portion of Item 14 is submitted as a separate
section of this report.
(d) Financial Statement Schedules
The response to this portion of Item 14 is submitted as a separate
section of this report.
14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DELTA APPAREL, INC.
(Registrant)
September 28, 2000 By: /s/ Herbert M. Mueller
- -------------------------------------------- ----------------------------------------
Date Herbert M. Mueller
Vice President, Chief Financial Officer
and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ C. C. Guy 9/27/00 /s/ Max Lennon 9/28/00
- -------------------------------------------- ----------------------------------------
C. C. Guy Date Max Lennon Date
Director Director
/s/ Buck A. Mickel 9/27/00
/s/ William F. Garrett 9/27/00 ----------------------------------------
- -------------------------------------------- Buck A. Mickel Date
William F. Garrett Date Director
Director
/s/ Herbert M. Mueller 9/28/00
/s/ Robert W. Humphreys 9/26/00 ----------------------------------------
- -------------------------------------------- Herbert M. Mueller Date
Robert W. Humphreys Date Vice President, Chief Financial Officer
President, Chief Executive Officer & & Treasurer (principal financial officer
Director and principal accounting officer)
/s/ James F. Kane 9/28/00
- --------------------------------------------
James F. Kane Date
Director
15
SCHEDULE II--CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
DELTA APPAREL, INC.
(In thousands)
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Beg Expense Charged to Other Credits Issued End
--------------- ---------------- --------------------- ------------------- ----------------
2000 $ 3,199 269 --- (1,558) 1,910
1999 776 2,795 --- (372) 3,199
1998 443 685 --- (352) 776
RETURNS AND ALLOWANCES
Beg Expense Charged to Other Credits Issued End
--------------- ---------------- --------------------- ------------------- ----------------
2000 1,855 1,196 --- (2,535) 516
1999 553 2,059 --- (757) 1,855
1998 141 195 483 (266) 553
TOTAL
Beg Expense Charged to Other Credits Issued End
--------------- ---------------- --------------------- ------------------- ----------------
2000 $ 5,054 1,465 --- (4,093) 2,426
1999 1,329 4,854 --- (1,129) 5,054
1998 584 880 483 (618) 1,329
16
EXHIBIT INDEX
10.7.1 List of directors and officers of the Company who signed the
document described in Exhibit 10.7.
13 Annual Report to Stockholders for fiscal year 2000.
21 Subsidiaries of the Company.
23 Report on Schedule for the years ended July 1, 2000, July 3,
1999 and June 27, 1998.
17
EXHIBIT 10.7.1
18
DIRECTORS AND OFFICERS
Listed below are the directors and officers of the Company who signed the
document described in Exhibit 10.7:
1) Robert W. Humphreys
2) Herbert M. Mueller
19
EXHIBIT 13
20
2000 ANNUAL REPORT
(Delta Apparel logo appears here)
To Our Fellow Stockholders:
Fiscal 2000 was an exciting year at Delta Apparel. As you know, on June 30, 2000
Delta Apparel, Inc. was spun-off from our parent corporation, Delta Woodside
Industries, Inc. Our stock now trades on2001, the American Stock Exchange under the
symbol DLA. Perhaps more important than the spin-off, during the past fiscal
year Delta Apparel made a solid operating profit after several years of
unacceptable performance.
As a part of the spin-off strategy, Delta Apparel was able to keep a large
equity base. This large equity base, combined with the strong cash flow
generated during the past year, has positioned Delta Apparel with a conservative
financial structure that will serve us well in the future.
For several years our company had concentrated on improving its manufacturing
operations and lowering product costs. While considerable progress was made,
these efforts did not result in positive operating results. This year we
developed a business plan to coordinate our manufacturing operations with a new
marketing direction. We concentrated on expanding our business with customers
well positioned to grow. We also concentrated on managing the distribution
channels our products are sold through to ensure we were building our business
for the future. These strategies resulted in increased demand for our products,
which allowed us to make more efficient use of our manufacturing operations,
while reducing our selling, general, and administrative expenses.
These improvements resulted in an operating profit of over $12 million. Average
inventories were reduced during the year resulting in much higher inventory
turns. We were also able to attract customers willing to purchase our products
on shorter payment terms, resulting in lower accounts receivable despite an
increase in sales.
We now believe Delta Apparel is positioned to generate a superior return on the
capital invested in the business. Our capital expenditures were modest during
the past year, and we will continue to carefully invest the capital available to
us. We do, however, believe we have the ability to grow our business in the
upcoming year and have operating profit growth at a multiple of our sales growth
rate.
A key part of our growth strategy will be to continue to expand our
manufacturing base in low cost countries. On August 3, 2000 we held a
groundbreaking ceremony for a new sewing facility in Campeche, Mexico. We are
considering an option to start phase two of this expansion at a later date,
which would include a textile operation. These facilities will be leased from a
local real estate developer thereby reducing our capital commitment and
providing flexibility for the future.
Delta Apparel has approximately 2,200 employees located in four states, Honduras
and Mexico. We all appreciate the opportunity you have given us to be the
stewards of your investment. As an independent company, our performance will now
be clear to all interested parties. We hope this visibility, combined with our
improved results, will help you achieve an adequate return on your investment in
Delta Apparel. All of us are excited to continue to work on your behalf in the
upcoming year and hope to meet many of you at our upcoming annual meeting.
Robert W. Humphreys
President and
Chief Executive Officer
21
CONTENTS:
Letter to Stockholders.......................................Inside Front Cover
Selected Financial Data.......................................................1
Management's Discussion and Analysis........................................2-6
Independent Auditors' Report..................................................7
Consolidated Financial Statements..........................................8-20
Market Information for Common Stock...........................Inside Back Cover
Corporate Directory...........................................Inside Back Cover
SELECTED FINANCIAL DATA
The selected financial data of Delta Apparel set forth below should be read in
conjunction with Delta Apparel's consolidated financial statements, including
the notes to those statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations". The consolidated financial statements of Delta Apparel include the operations and accounts of the Delta Apparel Company division of Delta Woodside, which consisted of operations and accounts included in various subsidiaries of Delta Woodside, and fromWoodside. From April 1998, they also include the operations and net assets of the RainsfordEdgefield Yarn Mill, operational control of which was transferred to the Delta Apparel Company division as of that date. The consolidated statement of operationsincome data for the yearyears ended June 29, 1996,27, 1998 and the consolidated balance sheet data as of June 29, 1996 and June 28, 1997, are
derived from unaudited consolidated financial statements not included in this
document. The consolidated statement of operations data for the year ended June
28, 1997,July 3, 1999 and the consolidated balance sheet data as of June 27, 1998, are
derived from, and are qualified by reference to, Delta Apparel's audited
consolidated financial statements not included in this document. The
consolidated statement of operations data for the years ended June 27, 1998,
July 3, 1999 and July 1, 2000, and the consolidated balance sheet data as of July 3, 1999, and July 1, 2000 are derived from, and are qualified by reference to, Delta Apparel'sApparel’s audited consolidated financial statements not included in this document. The consolidated statement of income data for the years ended July 1, 2000, June 30, 2001, and June 29, 2002, and the consolidated balance sheet data as of June 30, 2001 and June 29, 2002 are derived from, and are qualified by reference to, Delta Apparel’s audited consolidated financial statements included elsewhere in this document. Delta Apparel did not operate as a stand alone company for any
of the periods presented. Historical results are not necessarily indicative of results to be expected in the future. The selected financial data should be read in conjunction with the Consolidated Financial Statements and the related notes as indexed on page F-1 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7.
Fiscal Year Ended | |||||||||||||||||||||||
June 29, | June 30, | July 1, | July 3, | June 27, | |||||||||||||||||||
2002 | 2001 | 2000 | 1999 | 1998 | |||||||||||||||||||
(In thousands, except share amounts) | |||||||||||||||||||||||
Statement of Income Data: | |||||||||||||||||||||||
Net sales | $ | 131,601 | $ | 120,400 | $ | 114,466 | $ | 106,779 | $ | 107,967 | |||||||||||||
Cost of goods sold | (110,273 | ) | (97,101 | ) | (94,144 | ) | (101,125 | ) | (103,867 | ) | |||||||||||||
Selling, general and administrative expenses | (11,807 | ) | (11,024 | ) | (8,099 | ) | (13,720 | ) | (13,956 | ) | |||||||||||||
Impairment charges | — | — | — | (1,415 | ) | (7,459 | ) | ||||||||||||||||
Other income (loss) | 816 | 28 | (17 | ) | (221 | ) | (505 | ) | |||||||||||||||
Operating income (loss) | 10,337 | 12,303 | 12,206 | (9,702 | ) | (17,820 | ) | ||||||||||||||||
Interest expense, net | (677 | ) | (1,339 | ) | (7,417 | ) | (9,578 | ) | (6,379 | ) | |||||||||||||
Income (loss) before taxes | 9,660 | 10,964 | 4,789 | (19,280 | ) | (24,199 | ) | ||||||||||||||||
Income tax expense (benefit) | 3,188 | 987 | 60 | (90 | ) | 108 | |||||||||||||||||
Net income (loss) | $ | 6,472 | $ | 9,977 | $ | 4,729 | $ | (19,190 | ) | $ | (24,307 | ) | |||||||||||
Net Income Per Common Share *: | |||||||||||||||||||||||
Basic | $ | 1.48 | $ | 2.08 | $ | 1.00 | — | — | |||||||||||||||
Diluted | $ | 1.42 | $ | 2.02 | $ | 1.00 | — | — | |||||||||||||||
Dividends declared * | $ | 0.05 | — | — | — | — | |||||||||||||||||
Balance Sheet Data (at year end): | |||||||||||||||||||||||
Working capital (deficit) | $ | 43,773 | $ | 46,372 | $ | 34,807 | $ | (67,217 | ) | $ | (56,756 | ) | |||||||||||
Total assets | 88,346 | 91,323 | 79,107 | 84,357 | 99,950 | ||||||||||||||||||
Total long-term debt | 3,667 | 5,667 | 7,667 | 30,517 | 30,756 | ||||||||||||||||||
Stockholders’ equity/divisional deficit | 61,278 | 63,483 | 53,802 | (66,556 | ) | (47,366 | ) |
* | Adjusted to reflect 2-for-1 stock split effective as of |
11
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Quarterly Financial Data
For information regarding quarterly financial data, reference is made to Note 112 “Quarterly Financial Information (Unaudited)” to the consolidated financial statements.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The foregoing letter to stockholders and the following discussion contain
various "forward-looking statements". All statements, other than statements of
historical fact, that address activities, events or developments that Delta
Apparel expects or anticipates will or may occur in the future are
forward-looking statements. Examples are statements that concern future
revenues, future costs, future capital expenditures, business strategy,
competitive strengths, competitive weaknesses, goals, plans, references to
future success or difficulties and other similar information. The words
"estimate", "project", "forecast", "anticipate", "expect", "intend", "believe"
and similar expressions, and discussions of strategy or intentions, are intended
to identify forward-looking statements.
The forward-looking statements in this Annual Report are based on Delta
Apparel's expectations and are necessarily dependent upon assumptions, estimates
and data that Delta Apparel believes are reasonable and accurate but may be
incorrect, incomplete or imprecise. Forward-looking statements are also subject
to a number of business risks and uncertainties, any of which could cause actual
results to differ materially from those set forth in or implied by the
forward-looking statements. Accordingly, any forward-looking statements do not
purport to be predictions of future events or circumstances and may not be
realized.
Delta Apparel does not undertake publicly to update or revise the
forward-looking statements even if it becomes clear that any projected results
will not be realized.
Results of Operations
Fiscal Year 20002002 versus Fiscal Year 1999
2001
Net sales for fiscal year 20002002 were $114.5$131.6 million, an increase of $7.7$11.2 million, or 7.2%9.3%, from net sales of $106.8$120.4 million in fiscal year 1999. Fiscal year 2000
net sales included $0.9 million of outside yarn sales from the Rainsford plant
versus $5.0 million in2001. Higher fiscal year 1999. Higher fiscal 20002002 net sales were the result of increased unit sales (up 17.3%16.9%, accounting for $17.6$20.3 million) offset by lower average unit prices (down 4.8%6.5%, accounting for $5.8$9.1 million). The lower average unit prices were mainly due to decreased sales to private label customers, resulting from a result of a general declinedrop in market pricesretail demand. The Company believes its additional production capacity will be able to support planned sales growth for T-shirts,
reflecting lower raw material costs.
fiscal year 2003. There can, however, be no assurance that the Company will achieve this expected sales growth.
Gross profit increasedas a percentage of net sales decreased to $20.3 million16.2% in fiscal year 20002002 from $5.7 million19.4% in fiscal year 1999, and gross profit margin increased to 17.8% in fiscal year 2000
from 5.3% in fiscal year 1999,2001 primarily as a result of lower raw materialthe decrease in average selling prices and higher average cotton costs and
better manufacturing efficiencies. Included in fiscalthroughout the year. The gross profit for the year 1999 is a chargeended June 29, 2002 includes an expense of $1.7 million to increase reserves on certain discontinued and slow moving
inventory categories, and a charge of $2.4$0.4 million related to the write-offtraining and start-up of long-lived assets resulting from a physical inventory completed in the third
quarter of fiscal 1999.
DuringFayette textile facility. The gross profit for the year ended July 1, 2000, selling,June 30, 2001 includes an expense of $0.2 million related to the closing of the Company’s Washington, Georgia sewing facility and $1.1 million related to the start-up of the Mexican sewing facility. Assuming no material deterioration in pricing, the Company expects improvement in its gross profit during fiscal year 2003 due to expected improvements in cotton pricing and manufacturing efficiencies.
Selling, general and administrative expenses for fiscal year 2002 were $8.1 million, as compared to $13.7 million during the year ended July 3,
1999, a decrease of $5.6$11.8 million, or 41.0%. For the year ended July 1, 2000,
expenses in this category were 7.1%9.0% of net sales, as compared to 12.8%an increase of $0.8 million from $11.0 million, or 9.2% of net sales, for thein fiscal year ended July 3, 1999.2001. The decreaseincrease was primarily driven by an increase of $0.6 million in distribution costs, an increase of $0.6 million in selling general and
administrative expenses, was driven by a reductionan increase of $3.1$0.1 million in administrative costs, and a reductiondecrease of $0.6 million in bad debt expenseexpense. The increase in distribution expenses mainly relates to the West Coast Sales and Distribution Center, which was opened in the fourth fiscal quarter of $1.4 million.2001. The lower administrativeincrease in selling costs resulted from lower corporate overhead, loweris primarily due to higher commission expense and a reductionresulting from the increase in distribution expense. The lower bad debt
cost resulted from a lower level of aged receivables and the establishment in
fiscal year 1999 of reserves for bankrupt customers.
The fiscal year 2000 operating income was $12.2 million, compared to an
operating loss of $9.7 million in fiscal 1999. Delta Apparel's improved gross
profit contributed to the operating income in fiscal year 2000. The fiscal 1999
operating loss included a $1.4 million impairment charge to adjust the carrying
value of certain plant assets, primarily with respect to the Washington, Georgia
sewing facility and the Knoxville, Tennessee distribution center. The
Washington, Georgia facility incurs significantly higher operating cost as
compared to off-shore sewing operations. The distribution center is a multistory
building, which creates distribution inefficiencies. Both assets had book values
in excess of their respective market values. In the impairment charge, Delta
Apparel recognized the inability of the facilities to generate future cash flows
equal to book values. Both of these facilities were written down to their
respective estimated fair values.
For the year ended July 1, 2000, net interest expense was $7.4 million, as
compared to $9.6 million for the year ended July 3, 1999. In the latter part of
the year ended July 1, 2000, pursuant to the distribution agreement to which the
Company and Delta Woodside Industries, Inc. are parties related to the spin-off
of the Company by Delta Woodside, the affiliated debt was contributed to equity
or repaid and replaced with significantly lower levels of third party debt. This
decreased the Company's interest expense for the last two periods ofsales during the fiscal year. The increase in administrative costs is due to the expenses related to the Incentive Stock Program, offset by the absence of the proxy fight expenses incurred during fiscal year 2001. During fiscal year 2001, the Company incurred higher bad debt expenses than in either fiscal year 2002 or 2000 due to the Chapter 11 filing of a single customer. The decrease in interestbad debt expense from fiscal year 2001 is the result of not incurring this expense during fiscal year 2002. Delta Apparel expects its selling, general and administrative expenses to be approximately 9.0% of sales in fiscal year 2003.
Other income for fiscal year 2002 was $0.8 million, an increase of $0.8 million from fiscal year 2001. During the year, the Company sold its facility located in Washington, Georgia, resulting in a gain of $0.2 million. The Company also received the final payment on an installment sale of a previously idle manufacturing facility, resulting in a gain of $0.3 million. In April 2002 the Company purchased cotton options. Increases in the fair market value of the cotton options were marked to market in the fourth fiscal quarter, resulting in a gain of $0.3 million.
Operating income for fiscal year 2002 was $10.3 million, a decrease of $2.0 million, or 16.0%, from $12.3 million in fiscal year 2001. The decrease is the result of the lowerdecreased gross profit and increased selling, general and administrative expenses, partially offset by the increase in other income.
Net interest expense for fiscal year 2002 was $0.7 million, a decrease of $0.7 million, or 49.4%, from $1.3 million in fiscal year 2001. The reduction in interest resulted from a decrease in average principal balance outstanding on affiliated debtborrowings and a decrease in interest rates during the fiscal year ended
July 1, 2000.
year.
The effective tax rate for the year ended July 1, 2000June 29, 2002 was 1.3% on pretax income
as33.0% compared to a 0.5%9.0% for the year ended June 30, 2001. In fiscal year 2002, the Company reversed the valuation allowance against its state net operating loss carryforwards, resulting in the effective tax benefit onrate of 33.0%. Based upon its assessment of current results and future outlooks, the Company believes these state net operating losses will be used in the upcoming years. The low tax rate in fiscal 2001 was the result of the utilization of federal and state net operating loss carryforwards and valuation allowance adjustments.
Net income for fiscal year 2002 was $6.5 million, a pretax lossdecrease of $3.5 million, or 35.1%, from net income of $10.0 million for fiscal year 2001, due to the factors described above.
12
Inventories at June 29, 2002 totaled $35.5 million compared to $41.6 million at June 30, 2001. The decrease in inventory is related to a decrease of $6.1 million in finished goods, an increase of $2.0 million in raw materials and a decrease of $2.0 million in work in process. The decrease in finished goods inventory is the result of the increased sales in the fourth quarter over the prior year. During the fiscal year, the Company purchased additional cotton in order to take advantage of the lower cotton prices. This resulted in an increase in raw materials at June 29, 2002. The Company expects to increase finished goods inventory from its current level in order to support the expected growth in sales in fiscal year 2003.
Fiscal Year 2001 versus Fiscal Year 2000
Net sales for fiscal year 2001 were $120.4 million, an increase of $5.9 million, or 5.2%, from net sales of $114.5 million in fiscal year 2000. Included in the net sales for fiscal year 2000 is $0.9 million of outside yarn sales from the Edgefield plant. Higher fiscal year 2001 net sales were the result of increased unit sales (up 10.1%, accounting for $11.6 million) offset by lower average unit prices (down 4.5%, accounting for $5.7 million). The lower average unit prices were a result of various price promotions in the activewear market stemming from the weakened economy, partially offset by increased sales of higher margin products.
Gross profit as a percentage of net sales increased to 19.4% in fiscal year 2001 from 17.8% in fiscal year 2000 primarily as a result of increased sales of higher margin products. The gross profit for the year ended June 30, 2001 includes an expense of $0.2 million related to the closing of the Washington, Georgia sewing facility. In addition, the Company expensed $1.1 million related to the start-up of the Mexican sewing facility during fiscal year 2001 compared with $0.01 million during fiscal year 2000.
Selling, general and administrative expenses for fiscal year 2001 were $11.0 million, or 9.2% of net sales, an increase of $2.9 million from $8.1 million, or 7.1% of net sales, in fiscal year 2000. The increase was driven by an increase of $0.9 million in distribution costs, an increase of $0.4 million in selling expenses, an increase of $1.0 million in administrative costs, and an increase of $0.7 million in bad debt expense. In the fourth fiscal quarter of 2001, the Company opened its West Coast Sales and Distribution Center, increasing distribution expenses by $0.3 million. In addition, smaller average order sizes due to increased sales to direct customers resulted in increased distribution costs. The increase in selling costs is primarily due to higher commission expense resulting from the shift of sales to higher margin products and a change in the commission structure. The $1.0 million increase in administrative expenses was related to $0.2 million in legal and other fees to successfully defend against a proxy contest, $0.5 million in public reporting expenses and $0.2 million related to the Incentive Stock Program. The Chapter 11 filing of a single customer resulted in $0.5 million of increased bad debt expense.
Operating income for fiscal year 2001 was $12.3 million, an increase of $0.1 million, or 0.8%, from $12.2 million in fiscal year 2000. The increase is the result of the increased gross profit partially offset by increased selling, general and administrative expenses.
Net interest expense for fiscal year 2001 was $1.3 million, a decrease of $6.1 million, or 81.9%, from $7.4 million in fiscal year 2000. This decrease was primarily a result of the contribution to equity by Delta Woodside of intercompany debt in the fourth quarter of fiscal year 2000 pursuant to the distribution agreement related to the Spin-off of the Company by Delta Woodside.
The effective tax rate for the year ended June 30, 2001 was 9.0% compared to 1.3% for the year ended July 3, 1999.1, 2000. The low tax rates were the result of valuation allowance
adjustments onthe utilization of federal and state net operating loss carryovers.
carryforwards and valuation allowance adjustments.
Net income for thefiscal year ended July 1, 20002001 was $10.0 million, an increase of $5.2 million, or 111.0%, from net income of $4.7 million as compared to a
net loss of $19.2 million for thefiscal year ended July 3, 1999,2000, due to the factors described above.
23
Inventories at June 30, 2001 totaled $41.6 million compared to $28.2 million at July 1, 2000 totaled $28.2 million, compared to $27.0 million at
July 3, 1999.2000. The increase in inventory is mainly dueprimarily related to an increaseincreases in in-process inventory. Infinished goods. During the first three fiscal 1999, the Company's plants were shut-down for
maintenance during the last weekquarters of the fiscal year thereby reducing in-process2001, the Company increased inventory levels in order to meet the expected fourth quarter sales demand. In addition, increased inventory was required to support the West Coast Sales and Distribution Center that opened in June 2001. Due to general market conditions, fourth quarter sales were less than anticipated, resulting in increased inventory levels at year end.
June 30, 2001. In addition, the Company believes that the inventory levels at July 1, 2000 were below the optimal levels.
13
Capital expenditures in fiscal 2000year 2001 were $2.1$3.2 million as compared to $3.6
million in fiscal 1999. These investments were primarily for the textile
operations in order to increase capacity and lower costs. Expenditures were also
made for an upgrade of the Company's information systems.
Fiscal Year 1999 versus Fiscal Year 1998
Net sales for fiscal year 1999 were $106.8 million, which was consistent with
net sales of $108.0$2.1 million in fiscal year 1998. Fiscal year 1999 net sales
included $5.0 million of outside yarn sales from the Rainsford plant versus none
in2000. During fiscal year 1998. Control of operations, management2001, the Company increased its sewing capacity by expanding into Mexico and net assets ofopened a sales and distribution facility on the Rainsford plant was transferred by Delta Mills, Inc. (a wholly-owned subsidiary
of Delta Woodside) to Delta Apparel in April 1998, and the results of operations
and net assets of the Rainsford plant have been included in Delta Apparel since
that time. Lower fiscal year 1999 net sales were the result of lower unit prices
(down 11%, accounting for ($5.7) million) partially offset by increased unit
sales (up 12%, accounting for $11.7 million) as compared to fiscal year 1998.
Part of the average lower sales prices resulted from reserves that were
established for sales promotion programs to distributors ($0.5 million), an
increase in the reserve for general returns and allowances that resulted from a
higher rate of returns and allowances duringWest Coast. During the fiscal year, ($0.3 million), and
a higher numberthe Company committed $0.4 million of unresolved chargebacks at the end of the fiscal year ($0.3
million).
Gross profit increased to $5.7 million in fiscal year 1999 from $4.1 million in
fiscal year 1998, and gross profit margin increased to 5.3% in fiscal year 1999
from 3.8% in fiscal year 1998, as a result of lower raw material costs and
better manufacturing efficiencies. Included in fiscal year 1999 is a charge of
$1.7 million to increase reserves on certain discontinued and slow moving
inventory categories, and a charge of $2.4 millioncapital expenditures related to the write-off of
long-lived assets.
During the year ended July 3, 1999, selling, generalsewing expansion in Mexico and administrative expenses
were $13.7 million, as compared to $14.0 million during the year ended June 27,
1998, a decrease of $0.3 million or 1.7%. For the year ended July 3, 1999,
expenses in this category were 12.8% of net sales as compared to 12.9% of net
sales for the year ended June 27, 1998. The decrease in selling, general and
administrative expenses was driven by a reduction of $1.3 million in
administrative cost offset by bad debt expense of $1.6 million which was $1.0
million higher than the amount in fiscal 1998. The lower administrative cost
resulted from headcount and other cost reductions. The higher bad debt cost
resulted from reserves established of approximately $1.0 million for two
customer bankruptcies. In addition, the reserve for bad debt also increased in
the fiscal year due to a higher level of aged receivables.
The fiscal year 1999 operating loss was $9.7 million, compared to an operating
loss of $17.8 million in fiscal 1998. Delta Apparel's improved gross profit
contributed to the reduction in operating loss for fiscal year 1999.
The fiscal 1998 operating loss included an impairment charge of $7.3 million
that was recorded to write off the excess of cost over assigned value of net
assets. During the third quarter of fiscal year 1998, Delta Woodside announced
significant restructuring plans, including the shut down of the Stevcoknit knit
fabrics division and the transfer of operational control of the Rainsford plant
to Delta Apparel. Delta Apparel's results through the first three quarters of
fiscal year 1998 were disappointing and considerably below estimates made as
part of the year end close for fiscal year 1997 due to Delta Apparel's inability
to replace lost business and continuing to operate at a loss. Additionally, the
apparel industry appeared to have undergone significant structural adverse
change. These conditions triggered a review of impairment at Delta Apparel. At
that time, Delta Apparel's projected undiscounted cash flows were less than the
net book value of its long lived assets, including the net book value of the
Rainsford plant. The cash flows were discounted at 8%, which resulted in a $12.4
million impairment. $7.3 million of this was allocated to the excess of cost
over assigned value of net assets acquired associated with the assets of Delta
Apparel and $5.1 million was allocated to the Rainsford plant. Accordingly, a
charge of $7.3 million was taken to writeoff this excess of cost over assigned
value of net assets acquired. Delta Apparel acquired management control of the
Rainsford plant in April 1998 at its written down cost.
The fiscal 1999 operating loss included the $1.4 million impairment charge
described above under the subheading "Fiscal Year 2000 versus Fiscal Year 1999".
For the year ended July 3, 1999, net interest expense was $9.6 million, as
compared to $6.4$0.4 million for the year ended June 27, 1998. The increasedistribution facility in interest expense was primarily a result of the higher average principal balance
outstanding on affiliated debt.
The effective tax rate for the year ended July 3, 1999 was 0.5% as compared to a
(0.4)% effective tax rate for the year ended June 27, 1998. Although both years
reflected a pretax loss, the year ended July 3, 1999 had less of a tax benefit
due to increasing the valuation allowance for net operating loss carryover
benefits which may not be recognized in the future.
Net loss for the year ended July 3, 1999 was $19.2 million, as compared to $24.3
million for the year ended June 27, 1998, due to the factors described above.
24
Inventories at Delta Apparel at July 3, 1999 totaled $27.0 million, compared to
$32.3 million at June 27, 1998. The decrease resulted primarily from a strategic
focus to improve raw material and work in process inventory management utilizing
the benefits gained from the implementation of enterprise-wide resource planning
software, as well as a $1.7 million charge to increase reserves on certain
discontinued and slow moving inventory categories.
Capital expenditures in fiscal 1999 were $3.6 million as compared to $3.7
million in fiscal 1998. These investments were primarily for the modernization
of the textile operations, which has resulted in increased capacity and lower
costs, as well as the implementation of the Enterprise Wide Resource Planning
system.
Liquidity and Capital Resources
In the first ten and a half months of fiscal year 2000 and in each of fiscal
years 1999 and 1998, Delta Apparel's source of liquidity and capital was the
informal borrowing arrangement it had with its former parent company, Delta
Woodside. As funds were needed, the affiliated debt was increased, and as funds
were generated, the affiliated debt was decreased.
Delta Apparel's operating activities resulted in $16.5 million of cash provided
in fiscal year 2000 and uses of cash of $6.8 million in fiscal year 1999 and
$12.6 million in fiscal year 1998. The cash provided in fiscal year 2000 was
primarily due to net income, a reduction in accounts receivable and an increase
in accrued expenses and was after the charge of $7.2 million of interest due to
Delta Woodside on affiliated debt in fiscal year 2000. The uses of cash in each
of the fiscal years 1999 and 1998 were primarily associated with net losses
incurred in each of these years. These net losses included interest charges on
the affiliated debt of $9.5 million in fiscal year 1999 and $6.5 million in
fiscal year 1998.
Capital expenditures were $2.1 million in the year ended July 1, 2000 and $3.6
million in the year ended July 3, 1999. Capital expenditures in fiscal 2000 were
primarily for the Company's textile operations in order to increase capacity and
lower costs. Fiscal 2000California. Additional capital expenditures were also made to increase textile capacity and lower costs. Investments were also made related to the Company’s new Internet site which integrates customer service, inventory and shipping and offers our customers the ability to check the status of their orders, view inventory availability and place new orders.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s primary cash needs are for an upgrade ofworking capital and capital expenditures. In addition, the Company's information systems. Capital expendituresCompany uses cash to fund its share repurchases under its Stock Repurchase Program and, in fiscal 1999 were also
primarily for the textile operations in order to modernize the knitting, dyeing
and finishing facilities. In addition, during2002, its Dutch Tender Offer. During fiscal 1999year 2002, the Company implemented an Enterprise Wide Resource Planning system. Delta Apparel expects
fiscal 2001financed its working capital expenditures to approximate $4.1 million, primarily for the
Mexico sewing facility, a West Coast distribution center and continued process
improvements in the textile operations. At 2000, 1999, and 1998 fiscal year
ends, Delta Apparel's long-lived assets in Honduras comprised 15.6%, 6.6%, and
4.9%, respectively, of Delta Apparel's total net property, plant and equipment.
Pursuant to the Distribution Agreement, in mid-May 2000 all net debt amounts
(other than certain accounts payable) owed to Delta Woodside by the corporations
that previously had conducted the Delta Apparelcapital expenditure requirements through its operating profits. The Company division's business were
contributed to capital or repaid. As a result of this action, Delta Apparel no
longer owes any amounts to Delta Woodside, other than for the payment of
accounts payable, except as otherwise specifically provided in the Distribution
Agreement or the Tax Sharing Agreement.
Also in mid-May 2000, Delta Apparel entered into the following financing
arrangements:
-Delta Apparel entered intoalso has a credit agreement with a lending
institution, under which the lender providedto finance its cash needs. The credit agreement provides Delta Apparel with a 5-year $10 million term loan and a 3-year $25 million revolving credit facility. All loans under the credit agreement bear interest at rates based on an adjusted LIBOR rate plus an applicable margin or a bank'sthe bank’s prime rate plus an applicable margin. Delta Apparel granted the lender a first mortgage lien on or security interest in substantially all of its assets. Delta Apparel has the option to increase the revolving credit facility from $25 million to $30 million, provided that no event of default exists under the facility.
-The
On October 17, 2001, the credit agreement contains limitations on,was amended to increase from $3.0 million to $11.0 million the aggregate amount permitted for share repurchases.
On August 23, 2002, the Company amended its credit agreement to extend the due date of the revolver loan from May 1, 2003 to May 1, 2005. In addition, the amendment increases from $11.0 million to $23.0 million the aggregate amount permitted for share repurchases. The Company expects to continue to repurchase shares of its common stock under its Stock Repurchase Program during fiscal year 2003. In addition, the Company wanted to have adequate allowance for share repurchases if it decides to repurchase its common stock pursuant to a Dutch Tender Offer in the future. There can be, however, no assurance that the Company will repurchase shares of common stock under either its Stock Repurchase Program or prohibitionsunder a Dutch Tender Offer.
Delta Apparel’s operating activities provided $26.5 million of cash dividends, stock purchases, related party
transactions, mergers, acquisitions, salesin fiscal year 2002, resulted in the use of assets,
indebtedness$0.9 million of cash in fiscal year 2001 and investments.
-Principalprovided $16.5 million of the term loan will be repaidcash in monthly
installmentsfiscal year 2000. The cash provided in fiscal year 2002 was primarily due to net income plus depreciation, a decrease of principal based on$6.1 million in inventory and an increase of $4.4 million in accounts payable and an increase of $1.0 million in accrued expenses. The cash used in fiscal year 2001 was primarily due to an increase of $13.4 million in inventory and a 60 month amortization,
with paymentdecrease of all outstanding principal and interest
required upon earlier termination of the credit facility.
-Under the revolving credit facility, Delta Apparel is able$1.8 million in payables, offset by net income plus depreciation. The cash provided in fiscal year 2000 was primarily due to borrow up to $25 million (includingnet income plus depreciation, a $10.0 million letter of
credit subfacility) subject to borrowing base limitations
based onreduction in accounts receivable and inventory levels.
Approximately forty-five percentan increase in accrued expenses and was after the charge of the face amount$7.2 million of outstanding documentary letters of credit will reduce the
amount available under the revolving credit facility for
working capital loans.
In mid-May 2000, as part of the spin-off related transactions, Delta Apparel
purchased from Delta Mills the Rainsford plant, located in Edgefield, South
Carolina, and related inventory. Delta Mills and Delta Apparel agreed that the
purchase price for these assets would be the assets' book value as of the
effective date of the sale. The purchase price for the real property, furniture,
fixtures and equipment was approximately $12.0 million and the purchase price
for the inventory and other tangible personal property was approximately $1.4
million. This purchase price was paid in cash in the amount of approximately
$12.5 million and by the assumption by Delta Apparel of certain liabilities
aggregating approximately $0.9 million as of the effective date of the sale.
Delta Apparel paid the cash portion of the purchase price with borrowings under
its credit facility. Delta Apparel has had management control of the Rainsford
plant since April, 1998.
25
Typically, Delta Apparel's peak borrowing needs are in the third and fourth
fiscal quarters. When Delta Apparel entered into its new credit facility, it
owed amounts to the lender on Delta Woodside's existing credit facility orinterest due to Delta Woodside for certain borrowingson affiliated debt in fiscal year 2000.
Capital expenditures were $5.3 million in the year ended June 29, 2002 and $3.2 million in the year ended June 30, 2001. In April 2002, the Company purchased a textile facility located in Fayette, Alabama, resulting in $2.7 million of capital expenses. Additional capital expenditures were made to fund Delta Apparel's needs after
January 1, 2000. These borrowings, totaling $0.8 million were refinanced by
proceeds of Delta Apparel's new credit facility.
Delta Apparel expects that its peak borrowing needs will beincrease capacity and lower costs in its thirdexisting textile facilities. Fiscal year 2001 capital expenditures were primarily related to increasing capacity and fourthlowering costs in the textile facilities. In addition, capital expenditures were made in fiscal quartersyear 2001 related to the Company’s expansion into Mexico and that during those quarters it will be inthe opening of its lowest
cash position. West Coast Sales and Distribution facility.
Based onupon projections for fiscal 2001, the Company does not expect
to have to draw on the revolver credit facility for normal operating purposes, in
the foreseeable future.Company may borrow funds during fiscal 2003. At June 29, 2002, the Company had no borrowings outstanding on its revolving credit facility. The interest rate at June 29, 2002 on the credit facility at July 1, 2000term loan was 9.5%3.84%. At July 1, 2000, the Company had the ability to borrow $24.9 million
under the revolving credit facility.
Based on theseits expectations, Delta Apparel believes that its $25 million revolving credit facility should be sufficient to satisfy its foreseeable working capital needs, and that the cash flow generated by its operations and funds available under its revolving credit line should be sufficient to service its debt payment requirements, to satisfy its day-to-day working capital needs, and to fund its planned capital expenditures.expenditures and to pay dividends under its dividend program. Any material deterioration in Delta Apparel'sApparel’s results of operations, however, may result in Delta Apparelthe Company losing its ability to borrow under its revolving credit facility and to issue letters of credit to suppliers or may cause the borrowing availability under that facility to be insufficient for Delta Apparel'sthe Company’s needs.
14
Dividends and Purchases by Delta Apparel of its Own Shares
Delta Apparel'sApparel’s ability to pay cash dividends or purchase its own shares will largely be dependent on its earnings, financial condition, capital requirements, compliance with loan covenants and other relevant factors. Delta Apparel'sApparel’s credit agreement permits the payment of cash dividends in an amount up to 25% of cumulative net income (excluding extraordinary or unusual non-cash items), provided that no event of default exists or would result from that payment and after the payment at least $6.0 million remains available under the revolving credit facility. Delta Apparel'sAt June 29, 2002, the total amount permitted for payment of cash dividends under the Company’s credit agreement also permits up to an
aggregate of $3.0 million of purchaseswas $4.8 million. Purchases by Delta Apparel of its own stock are permitted provided that no event of default exists or would result from that action and after the purchase at least $3.0 million remains available to borrow under the revolving credit facility. On October 17, 2001, the credit agreement was amended to increase from $3.0 million to $11.0 million the aggregate amount permitted for share repurchases. On August 23, 2002, the credit agreement was again amended to increase from $11.0 million to $23.0 million the aggregate amount permitted for share repurchases.
On November 19, 2001, the Board of Directors authorized the repurchase by the Company of 350,000 shares (prior to adjustment to reflect the 2-for-1 stock split effective as of September 20, 2002) of the Delta Apparel common stock at a price not to exceed $22.00 but no less than $19.00 per share, pursuant to a Dutch Tender Offer. The Tender Offer commenced on December 7, 2001, and expired on January 10, 2002. A total of 338,143 shares were validly tendered, not properly withdrawn, and accepted for purchase by the Company at a purchase price of $22.00 per share. The Company paid $7.6 million for the shares purchased, including expenses, pursuant to the Dutch Tender Offer.
During the fiscal year ended June 29, 2002, the Company purchased 80,300 shares (prior to adjustment to reflect the 2-for-1 stock split effective as of September 20, 2002) of Delta Apparel common stock pursuant to its Stock Repurchase Program for an aggregate of $1.5 million. Since the inception of the program, the Company has purchased 115,000 shares of its stock under the program for a total cost of $2.1 million. The Company has authorization from the Board of Directors to spend up to $3.0 million for share repurchases under the Stock Repurchase Program. All purchases were made at the discretion of management in accordance with IRS guidelines for share repurchases after a spin-off.
Dividend Program
On April 18, 2002, the Board of Directors adopted a quarterly dividend program of ten cents per share per quarter (prior to adjustment to reflect the 2-for-1 stock split effective as of September 20, 2002). The Board declared the first dividend in the program of ten cents per share of common stock payable May 24, 2002 to shareholders of record as of the close of business on May 3, 2002. On August 15, 2002, the Board declared its second dividend in the program of ten cents per share of common stock payable September 16, 2002 to shareholders of record as of the close of business on September 3, 2002. The Board may terminate or amend the program at any time. The Company currently expects to continue the quarterly dividend program, with dividends of five cents per share to give effect to the September 20, 2002 stock split.
Stock Split
On August 15, 2002, the Board of Directors approved a 2-for-1 stock split of the Company’s common stock. The stock split will take the form of a 100% stock dividend to each shareholder of record as of September 6, 2002, with a payment date of September 20, 2002. As a result of the stock split, the number of outstanding shares of common stock will increase to approximately 4.0 million from approximately 2.0 million. All references in the financial statements with regard to the number of shares or average number of shares of common stock and related prices, dividends and per share amounts have been restated to reflect the 2-for-1 stock split.
CRITICAL ACCOUNTING POLICIES
Note 1 to the Consolidated Financial Statements in this report includes a summary of the significant accounting policies or methods used in the preparation of the Company’s Consolidated Financial Statements. The following is a brief description of the more significant accounting policies and methods used.
General
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The Company bases its estimates and judgments on historical experience and various other factors it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about
15
the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant estimates and assumptions relate to the adequacy of receivable and inventory reserves, self insurance accruals and the accounting for income taxes.
Allowance for Doubtful Accounts
Management judgments and estimates are made in connection with establishing the allowance for doubtful accounts receivable. Specifically, the Company analyzes the aging of accounts receivable balances, historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in customer payment terms. Significant changes in customer concentration or payment terms, deterioration of customer credit-worthiness or weakening in economic trends could have a significant impact on the collectibility of receivables and the Company’s operating results.
Inventory Write-Downs
Delta Apparel regularly reviews inventory quantities on hand and records a provision for damaged, excess and out of style or otherwise obsolete inventory based primarily on the Company’s estimated forecast of product demand for the next twelve months.
Self Insurance
Delta Apparel’s medical, prescription and dental care benefits are self-insured. The Company’s self-insurance accruals are based on claims filed and estimates of claims incurred but not reported. Estimates of claims incurred but not reported are developed by the Company based upon the historical claims and an estimate of the time it takes for a claim to be reported. If actual claims experience is significantly different from the estimates, it could have a significant impact on the Company’s operating results.
Income Taxes
Delta Apparel uses the liability method of accounting for income taxes, which requires recognition of temporary differences between financial statement and income tax basis of assets and liabilities measured by enacted tax rates. The Company has recorded deferred tax assets for certain operating loss carryforwards and nondeductible accruals. The Company established a valuation allowance in accordance with the provisions of FASB Statement No. 109, Accounting for Income Taxes. The Company continually reviews the adequacy of the valuation allowance and recognizes the benefits of deferred tax assets if reassessment indicates that it will from time to time consider the advisability
of instituting a dividend program. If Delta Apparel's board of directors
determines at any timeis more likely than not that the purchase of its own stock isdeferred tax assets will be realized based on earnings forecasts for the Company in the best
interestsrespective tax locations.
RECENT ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) 141, Business Combinations, and SFAS 142, Goodwill and Other Intangible Assets. The Company adopted SFAS 141 and 142 in its stockholdersfirst quarter of fiscal year 2002. The adoption of SFAS 141 and SFAS 142 had no impact on the Company’s financial statements.
In August 2001, the FASB issued SFAS 143, Accounting for Asset Retirement Obligations, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company is required and plans to adopt the provisions of SFAS No. 143 for the quarter ending September 28, 2002. The Company does not believe that the purchase complies with its loan
covenants, Delta Apparel may purchase its own shares inadoption of SFAS 143 will have a material impact on the marketCompany’s financial statements.
In August 2001, the FASB issued SFAS 144, Accounting for the Impairment or in
privately negotiated transactions.
QuantitativeDisposal of Long-Lived Assets, which addresses financial accounting and Qualitative Disclosures about Market Risk
reporting for the impairment or disposal of long-lived assets. The Company is required and plans to adopt the provisions of SFAS No. 144 for the quarter ending September 28, 2002. The Company does not believe that the adoption of SFAS 144 will have a material impact on the Company’s financial statements.
16
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Commodity Risk Sensitivity
The Company purchases cotton from approximately seveneleven established merchants with whom it has long standing relationships. The majority of the Company'sCompany’s purchases are executed using "on-call"“on-call” contracts. These on-call arrangements are used to insure that an adequate supply of cotton is available for the Company'sCompany’s requirements. Under on-call contracts, the Company agrees to purchase specific quantities for delivery on specific dates, with pricing to be determined at a later time. Prices are set according to prevailing prices, as reported by the New York Cotton Exchange, at the time of the Company'sCompany’s election to fix specific contracts.
Cotton on-call with a fixed price at July 1, 2000June 29, 2002 was valued at $10.8$15.0 million, and is scheduled for delivery between July 20002002 and December, 2000.March 2003. At July 1,
2000,June 29, 2002, the Company had unpriced contracts for deliveries between September, 2000January 2003 and June, 2001.December 2003. Based on the prevailing price at July 1, 2000,June 29, 2002, the value of these commitments are approximately $11.3$9.2 million. As commodity price
aberrations are generally short-tem in nature, and have not historically had a
significant long-term impact on operating performance, financial instruments are
not used to hedge commodity price risk. At July 1, 2000,June 29, 2002, a 10% decline in the market price of the cotton covered by Delta Apparel'sApparel’s fixed price contracts would have had a negative impact of approximately $1.1$1.5 million on the value of the contracts. At June 30, 2001, cotton on-call with a fixed price was valued at $17.5 million. At June 30, 2001, a 10% decline in the market price of the cotton covered by Delta Apparel’s fixed price contracts would have had a negative impact of approximately $1.7 million on the value of the contracts. The effect of a 10% decline in the market price of cotton on Delta Apparel’s fixed price contracts would have been less at June 29, 2002 than at June 30, 2001 because the value of Delta Apparel’s fixed price cotton on-call contracts was less on June 29, 2002. Daily price fluctuations are minimal, yet long-term trends in price movement could result in unfavorable pricing of cotton for Delta Apparel.
The Company uses derivatives, including cotton option contracts, to manage its exposure to movements in commodity prices. In April 2002, Delta Apparel purchased cotton options. The Company did not designate the options as hedge instruments upon inception. Accordingly, changes in the fair market value were marked to market. On June 29, 2002, the increase in fair market value of the cotton options resulted in a recognized gain of $0.3 million. The Company sold these cotton options subsequent to year end and recorded a $0.1 million loss in July 2002 on the sale of the options. These cotton options resulted in a net gain of $0.2 million for the Company. Delta Apparel does not currently own any other cotton options.
Interest Rate Sensitivity
Delta Apparel'sApparel’s credit agreement provides that the interest rate on outstanding amounts owed shall bear interest at variable rates. If the amountsamount of outstanding indebtedness at July 1, 2000June 29, 2002 under the term loan werehad been outstanding forduring the entire year and the interest rate on this outstanding indebtedness were increased by 1%,100 basis points, Delta Apparel'sApparel’s expense would behave been approximately $0.1 million$57,000, or 8.4%, higher than atfor the current rate of interest.fiscal year. The actual increase in interest expense resulting from a change in interest rates would depend on the magnitude of the increase in rates and the average principal balance outstanding.
Year 2000 Compliance
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Year 2000 computer problem refersconsolidated financial statements of Delta Apparel, Inc. and subsidiaries for each of the fiscal years in the three-year period ended June 29, 2002, together with Independent Auditors’ Reports thereon, are included in this report commencing on page F-1 and are listed under Part IV, Item 14 in this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
17
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated herein by reference from the portions of the definitive Proxy Statement to be filed with the Securities and Exchange Commission on or prior to 120 days following the end of the Company’s fiscal year under the headings “Election of Directors”, “Executive Officers” and “Section 16(a) Beneficial Ownership Reporting Compliance”.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference from the portions of the definitive Proxy Statement to be filed with the Securities and Exchange Commission on or prior to 120 days following the end of the Company’s fiscal year under the headings “Management Compensation” and “Compensation Committee Interlocks and Insider Participation”.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference from the portion of the definitive Proxy Statement to be filed with the Securities and Exchange Commission on or prior to 120 days following the end of the Company’s fiscal year under the heading “Stock Ownership of Principal Shareholders and Management”.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference from the portion of the definitive Proxy Statement to be filed with the Securities and Exchange Commission on or prior to 120 days following the end of the Company’s fiscal year under the heading “Related Party Transactions”.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES & REPORTS ON FORM 8-K
(a)(1) and (2) Financial Statements and Financial Statement Schedules
• | Independent Auditors’ Reports. | ||
• | Consolidated Balance Sheets as of June 29, 2002 and June 30, 2001. | ||
• | Consolidated Statements of Income for the years ended June 29, 2002, June 30, 2001 and July 1, 2000. | ||
• | Consolidated Statements of Stockholders’ Equity/Divisional Deficit for the years ended June 29, 2002, June 30, 2001 and July 1, 2000. | ||
• | Consolidated Statements of Cash Flows for the years ended June 29, 2002, June 30, 2001 and July 1, 2000. | ||
• | Notes to Consolidated Financial Statements. |
The following consolidated financial statement schedule of Delta Apparel, Inc. and subsidiaries is included in Item 14(d):
Schedule II — Consolidated Valuation and Qualifying Accounts |
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. Columns omitted from schedules filed have been omitted because the information is not applicable.
(a)(3) Listing of Exhibits*
2.1. Distribution Agreement by and among Delta Woodside Industries, Inc, DH Apparel Company, Inc. (subsequently renamed Duck Head Apparel Company, Inc.) and the Company (excluding schedules and exhibits): Incorporated by reference to Exhibit 2.1 to the potentialCompany’s Form 10.
18
3.1. Articles of Incorporation of the Company: Incorporated by reference to Exhibit 3.1 to the Company’s Form 10.
3.2.1 Bylaws of the Company: Incorporated by reference to Exhibit 3.2.1 to the Company’s Form 10.
3.2.2 Amendment to Bylaws of the Company adopted January 20, 2000: Incorporated by reference to Exhibit 3.2.2 to the Company’s Form 10.
3.2.3 Amendment to Bylaws of the Company adopted February 17, 2000: Incorporated by reference to Exhibit 3.2.3 to the Company’s Form 10.
3.2.4 Amendment to Bylaws of the Company adopted June 6, 2000: Incorporated by reference to Exhibit 3.2.4 to the Company’s Form 10.
4.1. See Exhibits 3.1, 3.2.1, 3.2.2, 3.2.3, 3.2.4, 10.8.1, 10.8.2, 10.8.3, 10.8.4, 10.8.5, 10.8.6 and 10.8.7.
4.2. Specimen certificate for systemcommon stock, par value $0.01 per share, of the Company: Incorporated by reference to Exhibit 4.2 to the Company’s Form 10.
10.1. See Exhibit 2.1.
10.2.1 Tax Sharing Agreement by and processing
failuresamong Delta Woodside Industries, Inc., Duck Head Apparel Company, Inc. and the Company: Incorporated by reference to Exhibit 2.2 to the Report on Form 8-K of date-related data as a resultDelta Woodside Industries, Inc. (File No. 1-10095) with date of computer-controlled systems using
two digits rather than fourJune 30, 2000.
10.2.2 Amendment to defineTax Sharing Agreement dated August 6, 2001 by and amount Delta Woodside Industries, Inc., Duck Head Apparel Company, Inc. and the applicable year. For example, software
programs that have time sensitive components may recognize a date represented as
"00" asCompany: Incorporated by reference to Exhibit 10.2.2 to the Company’s Annual Report on Form 10-K for the fiscal year 1900 rather thanended June 30, 2001.
10.3.1 Letter dated December 14, 1998, from Delta Woodside Industries, Inc. to Robert W. Humphreys: Incorporated by reference to the Form 10-Q/A of Delta Woodside Industries, Inc. for the quarterly period ended December 26, 1998 (Commission File No. 1-10095).**
10.3.2 Letter dated April 22, 1999, from Delta Woodside Industries, Inc. to Robert W. Humphreys: Incorporated by reference to the Form 10-K of Delta Woodside Industries, Inc. for the fiscal year 2000.ended July 3, 1999 (Commission File No. 1-10095).**
10.4. Delta Apparel, has not suffered any material adverse effectInc. 2000 Stock Option Plan, Effective as a resultof February 15, 2000, Amended & Restated March 15, 2000: Incorporated by reference to Exhibit 10.4 to the Company’s Form 10.**
10.5. Delta Apparel, Inc. Incentive Stock Award Plan, Effective February 15, 2000, Amended & Restated March 15, 2000: Incorporated by reference to Exhibit 10.5 to the Company’s Form 10.**
10.6. Delta Apparel, Inc. Deferred Compensation Plan for Key Managers: Incorporated by reference to Exhibit 10.6 to the Company’s Form 10.**
10.7. Form of Amendment of Certain Rights and Benefits Relating to Stock Options and Deferred Compensation by and between Delta Woodside Industries, Inc., the Company and certain pre-spin-off Delta Woodside Industries, Inc. plan participants: Incorporated by reference to Exhibit 10.7 to the Company’s Form 10.**
10.7.1 List of directors and officers of the YearCompany who signed the document described in Exhibit 10.7: Incorporated by reference to Exhibit 10.7.1 to the Company’s Annual Report on Form 10-K for fiscal year ended July 1, 2000.
10.8.1 Collateral Assignment of Acquisition Agreements dated May 16, 2000 problem. We continue to monitor our systems for Year 2000 compliance.
26
Environmental Mattersby and among DH Apparel Company, Inc., Delta Apparel, is subjectInc. in favor of Congress Financial Corporation (Southern): Incorporated by reference to various federal, stateExhibit 10.8.1 to the Company’s Form 10.
10.8.2 Loan and local environmental lawsSecurity Agreement by and between Congress Financial Corporation (Southern), Delta Apparel, Inc., dated May 16, 2000 (excluding exhibits and schedules): Incorporated by reference to Exhibit 10.8.2 to the Company’s Form 10.
19
10.8.3 Term Promissory Note in the principal amount of $10,000,000 dated May 16, 2000 by Delta Apparel, Inc. in favor of Congress Financial Corporation (Southern): Incorporated by reference to Exhibit 10.8.3 to the Company’s Form 10.
10.8.4 Pledge and Security Agreement dated May 16, 2000 by Delta Apparel, Inc. by and in favor of Congress Financial Corporation (Southern) (excluding exhibits and schedules): Incorporated by reference to Exhibit 10.8.4 to the Company’s Form 10.
10.8.5 Trademark Security Agreement dated May 16, 2000 by and between Delta Apparel, Inc. and Congress Financial Corporation (Southern) (excluding exhibits and schedules): Incorporated by reference to Exhibit 10.8.5 to the Company’s Form 10.
10.8.6 Amendment No. 1 to Loan and Security Agreement dated October 17, 2001 by and between Delta Apparel, Inc. and Congress Financial Corporation (Southern) (excluding exhibits and schedules): Incorporated by reference to Exhibit 10.8.6 to Quarterly Report on Form 10-Q for fiscal quarter ended December 29, 2001.
10.8.7 Amendment No. 2 to Loan and Security Agreement dated August 23, 2002 by and between Delta Apparel, Inc. and Congress Financial Corporation (Southern) (excluding exhibits and schedules)
10.9 Form of Agreement Respecting Delta Woodside Industries, Inc. Long Term Incentive Plan dated in June 2000: Incorporated by reference to Exhibit 10.9.1 to Annual Report on Form 10-K for fiscal year ended July 1, 2000 of Delta Woodside Industries, Inc. (Commission File No. 1-10095.)**
10.10 Employment Agreement between Delta Apparel, Inc. and Herbert M. Mueller dated November 7, 2000: Incorporated by reference to Exhibit 10.10 to Quarterly Report on Form 10-Q for fiscal quarter ended December 30, 2000.**
10.11 Employment Agreement between Delta Apparel, Inc. and Martha M. Watson dated November 7, 2000: Incorporated by reference to Exhibit 10.10 to Quarterly Report on Form 10-Q for fiscal quarter ended December 30, 2000.**
21 Subsidiaries of the Company: Incorporated by reference to Exhibit 21 to the Company’s Annual Report on Form 10-K for fiscal year ended July 1, 2000.
23.1 Consent of Ernst & Young LLP, independent auditors.
23.2 Consent of KPMG LLP, independent auditors.
99.1 Certificate Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed by Robert W. Humphreys, President and Chief Executive Officer.
99.2 Certificate Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed by Herbert M. Mueller, Vice President and Chief Financial Officer.
* All reports previously filed by the Company with the Commission pursuant to the Securities Exchange Act, and the rules and regulations concerning, among other things, wastewater discharges, storm
water flows, air emissions, ozone depletion and solid waste disposal. Delta
Apparel's plants generate very small quantitiespromulgated thereunder, exhibits of hazardous waste, which are either recycledincorporated to this Report by reference thereto, were filed under Commission File Number 1-15583.
** This is a management contract or disposedcompensatory plan or arrangement.
The registrant agrees to furnish supplementally to the Securities and Exchange Commission a copy of off-site. Mostany omitted schedule or exhibit to any of its plants are required to
possess one or more discharge permits.the above filed exhibits upon request of the Commission.
(b) Reports on Form 8-K
The Company did not file any report on Form 8-K during the fiscal quarter ended June 29, 2002. On August 25, 2000, Delta Apparel's Maiden, North Carolina textile plant
received16, 2002, the Company filed a NoticeCurrent Report on Form 8-K reporting the declaration of Violation and Assessmenta 2-for-1 Stock Split.
(c) Exhibits
See Item 14(a) above.
20
SIGNATURES
Pursuant to the requirements of Civil Penalty amounting to $2.1
thousand for violationSection 13 or 15(d) of the 11% chronic toxicity effluent discharge
limitation. A reviewSecurities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DELTA APPAREL, INC. (Registrant) | ||
August 29, 2002 | By: /s/ Herbert M. Mueller | |
Date | Herbert M. Mueller Vice President, Chief Financial Officer and Treasurer |
Pursuant to the requirements of the facility's toxicity self-monitoring data from March,
2000 indicated a 4.1% chronic value, which isSecurities Exchange Act of 1934, this report has been signed below by the 11% limitation. following persons on behalf of the registrant and in the capacities and as of the dates indicated.
/s/ David S. Fraser | 8-26-02 | /s/ Max Lennon | 8-28-02 | |||
David S. Fraser | Date | Max Lennon | Date | |||
Director | Director | |||||
/s/ William F. Garrett | 8-26-02 | /s/ E. Erwin Maddrey, II | 8-26-02 | |||
William F. Garrett | Date | E. Erwin Maddrey, II | Date | |||
Director | Director | |||||
/s/ C. C. Guy | 8-28-02 | /s/ Buck A. Mickel | 8-26-02 | |||
C. C. Guy | Date | Buck A. Mickel | Date | |||
Director | Director | |||||
/s/ Robert W. Humphreys | 8-27-02 | /s/ Herbert M. Mueller | 8-29-02 | |||
Robert W. Humphreys | Date | Herbert M. Mueller | Date | |||
President, Chief Executive Officer and Director | Vice President, Chief Financial Officer & Treasurer (principal financial officer and principal accounting officer) | |||||
/s/ James F. Kane | 8-26-02 | |||||
James F. Kane | Date | |||||
Director |
21
Delta Apparel, has respondedInc and Subsidiaries
Index to the violation by reformulating the high salt dye
formulas. This has brought the Company within the permitted levels. Delta
Apparel believes that it is in compliance in all material respects with all
other federal, state, and local environmental statutes and requirements.
Delta Apparel's Maiden, North Carolina textile plant has received complaints
from downstream owners about the colorConsolidated Financial Statements
Independent Auditors’ Reports | F-2 | |||
Consolidated Balance Sheets as of June 29, 2002 and June 30, 2001 | F-4 | |||
Consolidated Statements of Income for the years ended June 29, 2002, June 30, 2001 and July 1, 2000 | F-5 | |||
Consolidated Statements of Stockholders’ Equity/Divisional Deficit for the years ended June 29, 2002, June 30, 2001 and July 1, 2000 | F-6 | |||
Consolidated Statements of Cash Flows for the years ended June 29, 2002, June 30, 2001 and July 1, 2000 | F-7 | |||
Notes to Consolidated Financial Statements | F-8 |
F-1
Report of its effluent discharge into a river's
tributary. Although Delta Apparel's current NPDES permit, which expires in July
2001, does not regulate the color of effluent, some additional regulatory
control of color is likely to occur in the future. Delta Apparel believes that
it can reduce the color of its effluent discharge at an estimated cost of
approximately $200,000 to $300,000 per year.
As a result of environmental rules relating to waste water discharge, any
significant increase in production capacity of the Maiden, North Carolina plant
would require significant expenditures for environmental studies and, depending
on the results of those studies, possible significant other expenditures. The
plant holds a permit to discharge 1 million gallons of waste water per day. As a
result of process improvements, Delta Apparel has reduced the amount of waste
water discharge from 950,000 gallons to a current level of approximately 825,000
gallons per day.
Delta Apparel incurs capital and other expenditures in each year that are aimed
at achieving compliance with current and future environmental standards.
Generally, the environmental rules applicable to Delta Apparel are becoming
increasingly stringent. Delta Apparel does not expect that the amount of these
expenditures in the future will have a material adverse effect on its
operations, financial condition or liquidity. There can be no assurance,
however, that future changes in federal, state, or local regulations,
interpretations of existing regulations or the discovery of currently unknown
problems or conditions will not require substantial additional expenditures.
Similarly, the extent of Delta Apparel's liability, if any, for past failures to
comply with laws, regulations and permits applicable to its operations cannot be
determined.
INDEPENDENT AUDITORS' REPORT
Independent Auditors
The Board of Directors,
Delta Apparel, Inc.:
We have audited the accompanying consolidated balance sheets of Delta Apparel, Inc. and subsidiaries (the "Company"“Company”), as described in note 1, as of July 1,
2000June 29, 2002 and July 3, 1999June 30, 2001, and the related consolidated statements of income, stockholders’ equity and cash flows for the two years then ended. Our audits also included the financial statement schedule listed in the index of Item 14 (a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of June 29, 2002 and June 30, 2001, and the consolidated results of its operations stockholders'and cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States. Also in our opinion, the related financial statement schedule for the years ended June 29, 2002 and June 30, 2001, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP |
Atlanta, Georgia
August 2, 2002, except as to Note 13, as to which the date is August 15, 2002
F-2
Independent Auditors’ Report
The Board of Directors
Delta Apparel, Inc.:
We have audited the accompanying consolidated statements of income, stockholders’ equity/divisional deficit and cash flows of Delta Apparel, Inc. and subsidiaries for eachthe year ended July 1, 2000. In connection with our audit of the yearsconsolidated financial statements, we have also audited the financial statement schedule listed in the three-year periodindex of Item 14(a) for the year ended July 1, 2000. These consolidated financial statements and financial statement schedule are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
audit.
We conducted our auditsaudit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provideaudit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial positionresults of operations and the cash flows of Delta Apparel, Inc. and subsidiaries as of July 1, 2000 and July 3, 1999, andfor the results of their
operations and their cash flows for each of the years in the three-year periodyear ended July 1, 2000, in conformity with accounting principles generally accepted in the United States of America. KPMG LLP
Also in our opinion, the related financial statement schedule for the year ended July 1, 2000, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
KPMG LLP |
Atlanta, Georgia
August 4, 2000
27
DELTA APPAREL, INC.
(as described in Note 1)
F-3
Delta Apparel, Inc. and Subsidiaries
Consolidated Balance Sheets
(Amounts
(Amounts in thousands, except share amounts)
June 29, 2002 | June 30, 2001 | |||||||||||
Assets | ||||||||||||
Current assets: | ||||||||||||
Cash | $ | 4,102 | $ | 165 | ||||||||
Accounts receivable, less allowances of $1,512 in 2002 and $1,812 in 2001 | 22,259 | 21,706 | ||||||||||
Other receivables | 553 | 336 | ||||||||||
Inventories | 35,483 | 41,619 | ||||||||||
Prepaid expenses and other current assets | 1,835 | 1,597 | ||||||||||
Deferred income taxes | 1,119 | 61 | ||||||||||
Income taxes receivable | — | 1,950 | ||||||||||
Total current assets | 65,351 | 67,434 | ||||||||||
Property, plant and equipment, net | 22,992 | 23,750 | ||||||||||
Other assets | 3 | 139 | ||||||||||
$ | 88,346 | $ | 91,323 | |||||||||
Liabilities and Stockholders’ Equity | ||||||||||||
Current liabilities: | ||||||||||||
Accounts payable | $ | 9,385 | $ | 4,946 | ||||||||
Accrued expenses | 8,333 | 7,681 | ||||||||||
Current portion of long-term debt | 2,000 | 8,435 | ||||||||||
Income taxes payable | 1,860 | — | ||||||||||
Total current liabilities | 21,578 | 21,062 | ||||||||||
Long-term debt | 3,667 | 5,667 | ||||||||||
Deferred income taxes | 700 | 375 | ||||||||||
Other liabilities | 1,123 | 736 | ||||||||||
Total liabilities | 27,068 | 27,840 | ||||||||||
Commitments and contingencies | ||||||||||||
Stockholders’ equity: | ||||||||||||
Preferred stock—2,000,000 shares authorized, none issued and outstanding | — | — | ||||||||||
Common stock *—par value $.01 a share, 7,500,000 shares authorized, 4,823,486 shares issued, and 4,029,302 and 4,777,646 shares outstanding as of June 29, 2002 and June 30, 2001, respectively | 48 | 48 | ||||||||||
Additional paid-in capital | 53,889 | 53,889 | ||||||||||
Retained earnings | 15,912 | 9,947 | ||||||||||
Treasury stock *—794,184 and 45,840 shares as of June 29, 2002 and June 30, 2001, respectively | (8,571 | ) | (401 | ) | ||||||||
Total stockholders’ equity | 61,278 | 63,483 | ||||||||||
$ | 88,346 | $ | 91,323 | |||||||||
* | Adjusted to reflect 2-for-1 stock split effective as of |
See accompanying notes to consolidated financial statements.
28
DELTA APPAREL, INC.
(as described in Note 1)
F-4
Delta Apparel, Inc. and Subsidiaries
Consolidated Statements of Operations
(AmountsIncome
(Amounts in thousands, except per share data)
amounts)
Year Ended | ||||||||||||||
June 29, 2002 | June 30, 2001 | July 1, 2000 | ||||||||||||
Net sales | $ | 131,601 | $ | 120,400 | $ | 114,466 | ||||||||
Cost of goods sold | 110,273 | 97,101 | 94,144 | |||||||||||
Gross profit | 21,328 | 23,299 | 20,322 | |||||||||||
Selling, general and administrative expenses | 11,468 | 10,103 | 7,830 | |||||||||||
Provision for bad debts | 339 | 921 | 269 | |||||||||||
Other (income) expense | (816 | ) | (28 | ) | 17 | |||||||||
Operating income | 10,337 | 12,303 | 12,206 | |||||||||||
Interest expense: | ||||||||||||||
Intercompany interest expense | — | — | 7,237 | |||||||||||
Interest expense, net | 677 | 1,339 | 180 | |||||||||||
677 | 1,339 | 7,417 | ||||||||||||
Income before income taxes | 9,660 | 10,964 | 4,789 | |||||||||||
Income tax expense | 3,188 | 987 | 60 | |||||||||||
Net income | $ | 6,472 | $ | 9,977 | $ | 4,729 | ||||||||
Earnings per share (2000 Proforma) * | ||||||||||||||
Basic | $ | 1.48 | $ | 2.08 | $ | 1.00 | ||||||||
Diluted | $ | 1.42 | $ | 2.02 | $ | 1.00 | ||||||||
Weighted average number of shares outstanding (2000 Proforma)* | 4,368 | 4,806 | 4,730 | |||||||||||
Dilutive effect of stock options * | 192 | 142 | — | |||||||||||
Weighted average number of shares assuming dilution * | 4,560 | 4,948 | 4,730 | |||||||||||
* | Adjusted to reflect 2-for-1 stock split effective as of |
See accompanying notes to consolidated financial statements.
29
DELTA APPAREL, INC.
(as described in Note 1)
F-5
Delta Apparel, Inc. and Subsidiaries
Consolidated Statements of Stockholders'Stockholders’ Equity/Divisional Deficit
(Amounts
(Amounts in thousands, except share amounts)
Additional
Common stock paid-in Retained Divisional
Shares Amount capital earnings deficit Total
----------- ------- --------- -------- -------------- ------------
Balance at June 28, 1997 -- $ -- -- -- (23,059) (23,059)
Net loss -- -- -- -- (24,307) (24,307)
----------- ------- --------- -------- -------------- ------------
Balance at June 27, 1998 -- -- -- -- (47,366) (47,366)
Net loss -- -- -- -- (19,190) (19,190)
----------- ------- --------- -------- -------------- ------------
Balance at July 3, 1999 -- -- -- -- (66,556) (66,556)
Net income -- -- -- -- 4,729 4,729
Spin-off (note 1) 2,399,863 24 53,778 -- 61,827 115,629
----------- ------- --------- -------- -------------- ------------
Balance at July 1, 2000 2,399,863 $ 24 53,778 -- -- 53,802
=========== ======= ========= ======== ============== ============
Common Stock | Additional | Treasury Stock | |||||||||||||||||||||||||||||||
Paid-In | Retained | Divisional | |||||||||||||||||||||||||||||||
Shares | Amount | Capital | Earnings | Deficit | Shares | Amount | Total | ||||||||||||||||||||||||||
Balance at July 3, 1999 | — | $ | — | $ | — | $ | — | $ | (66,556 | ) | — | $ | — | $ | (66,556 | ) | |||||||||||||||||
Net income | — | — | — | — | 4,729 | — | — | 4,729 | |||||||||||||||||||||||||
Spin-off (note 1) | 2,399,863 | 24 | 53,778 | — | 61,827 | — | — | 115,629 | |||||||||||||||||||||||||
Balance at July 1, 2000 | 2,399,863 | 24 | 53,778 | — | — | — | — | 53,802 | |||||||||||||||||||||||||
Net income | — | — | — | 9,977 | — | — | — | 9,977 | |||||||||||||||||||||||||
Treasury stock acquired | — | — | — | — | — | 34,700 | (607 | ) | (607 | ) | |||||||||||||||||||||||
Stock grant | 100 | — | 1 | — | — | — | — | 1 | |||||||||||||||||||||||||
Exercised under Awards Plan | 11,780 | — | 110 | (4 | ) | — | (11,780 | ) | 206 | 312 | |||||||||||||||||||||||
Cash dividend ($.001 per share) | — | — | — | (2 | ) | — | — | — | (2 | ) | |||||||||||||||||||||||
Balance at June 30, 2001 | 2,411,743 | 24 | 53,889 | 9,971 | — | 22,920 | (401 | ) | 63,483 | ||||||||||||||||||||||||
Net income | — | — | — | 6,472 | — | — | — | 6,472 | |||||||||||||||||||||||||
Treasury stock acquired | — | — | — | — | — | 418,443 | (9,114 | ) | (9,114 | ) | |||||||||||||||||||||||
Stock grant | — | — | — | (1 | ) | — | (1,366 | ) | 26 | 25 | |||||||||||||||||||||||
Exercised under Awards Plan | — | — | — | 62 | — | (11,780 | ) | 254 | 316 | ||||||||||||||||||||||||
Exercised under Option Plan | — | — | — | (368 | ) | — | (31,125 | ) | 664 | 296 | |||||||||||||||||||||||
Cash dividend ($.10 per share) | — | — | — | (200 | ) | — | — | — | (200 | ) | |||||||||||||||||||||||
2-for-1 stock split (See Note 13) | 2,411,743 | 24 | — | (24 | ) | — | 397,092 | — | — | ||||||||||||||||||||||||
Balance at June 29,2002 | 4,823,486 | $ | 48 | $ | 53,889 | $ | 15,912 | $ | — | 794,184 | $ | (8,571 | ) | $ | 61,278 | ||||||||||||||||||
See accompanying notes to consolidated financial statements.
30
DELTA APPAREL, INC.
(as described in Note 1)
F-6
Delta Apparel, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Amounts
(Amounts in thousands)
Year ended
-----------------------------------------
July 1, July 3, June 27,
2000 1999 1998
---------- -------- --------
Operating activities:
Net income (loss) $ 4,729 (19,190) (24,307)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 6,597 9,208 4,312
Amortization -- 6 155
Impairment charges -- 1,415 7,459
Provision for (recovery of) allowances on accounts receivable (2,627) 3,725 745
Loss on sale of property and equipment 35 347 29
Changes in operating assets and liabilities:
Accounts receivable 4,803 (2,702) (7,661)
Inventories (1,173) 5,255 8,409
Prepaid expenses and other current assets (294) 72 310
Other noncurrent assets (94) 38 (253)
Accounts payable 1,432 (6,214) 3,302
Accrued expenses 3,056 1,083 1,100
Income taxes payable -- (198) (1,730)
Due to/from affiliates 9 530 (4,513)
Other liabilities 41 (136) 61
---------- -------- --------
Net cash provided by (used in) operating activities 16,514 (6,761) (12,582)
---------- -------- --------
Investing activities:
Purchases of property, plant and equipment (2,092) (3,593) (3,658)
Proceeds from sale of property, plant and equipment 99 1,683 302
---------- -------- --------
Net cash used in investing activities (1,993) (1,910) (3,356)
---------- -------- --------
Financing activities:
Proceeds from (repayment of) long-term financing 9,328 (239) (239)
Change in due to affiliates, net (23,836) 9,211 16,274
---------- -------- --------
Net cash (used in) provided by financing activities (14,508) 8,972 16,035
---------- -------- --------
Increase in cash 13 301 97
Cash at beginning of year 402 101 4
---------- -------- --------
Cash at end of year $ 415 402 101
========== ======== ========
Supplemental cash flow information:
Cash paid during the year for interest $ 157 33 53
========== ======== ========
Noncash investing activity - transfer of plant and
equipment from Parent company $ -- -- 18,758
========== ======== ========
Year Ended | ||||||||||||||||
June 29, 2002 | June 30, 2001 | July 1, 2000 | ||||||||||||||
Operating activities: | ||||||||||||||||
Net income | $ | 6,472 | $ | 9,977 | $ | 4,729 | ||||||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||||||||||
Depreciation | 6,390 | 6,340 | 6,597 | |||||||||||||
Deferred income taxes | (733 | ) | 314 | — | ||||||||||||
Reduction in allowances on accounts receivable | (300 | ) | (614 | ) | (2,627 | ) | ||||||||||
Loss (gain) on sale of property and equipment | (95 | ) | 5 | 35 | ||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Accounts receivable | (470 | ) | 687 | 4,803 | ||||||||||||
Inventories | 6,136 | (13,412 | ) | (1,173 | ) | |||||||||||
Prepaid expenses and other current assets | (684 | ) | (497 | ) | (294 | ) | ||||||||||
Income taxes receivable | 1,950 | (1,950 | ) | — | ||||||||||||
Other noncurrent assets | 136 | 174 | (94 | ) | ||||||||||||
Accounts payable | 4,439 | (1,754 | ) | 1,432 | ||||||||||||
Accrued expenses | 992 | (423 | ) | 3,056 | ||||||||||||
Income taxes payable | 1,860 | — | — | |||||||||||||
Due to/from affiliates | — | — | 9 | |||||||||||||
Other liabilities | 387 | 214 | 41 | |||||||||||||
Net cash provided by (used in) operating activities | 26,480 | (939 | ) | 16,514 | ||||||||||||
Investing activities: | ||||||||||||||||
Purchases of property, plant and equipment | (5,254 | ) | (3,180 | ) | (2,092 | ) | ||||||||||
Proceeds from sale of property, plant and equipment | 164 | 43 | 99 | |||||||||||||
Net cash used in investing activities | (5,090 | ) | (3,137 | ) | (1,993 | ) | ||||||||||
Financing activities: | ||||||||||||||||
Proceeds from (repayment of) revolving credit facility, net | (6,435 | ) | 6,435 | — | ||||||||||||
Proceeds from (repayment of) long-term debt | (2,000 | ) | (2,000 | ) | 9,328 | |||||||||||
Change in due to affiliates, net | — | — | (23,836 | ) | ||||||||||||
Dividends paid | (200 | ) | (2 | ) | — | |||||||||||
Repurchase common stock | (9,114 | ) | (607 | ) | — | |||||||||||
Proceeds from exercise of stock options | 296 | — | — | |||||||||||||
Net cash provided by (used in) financing activities | (17,453 | ) | 3,826 | (14,508 | ) | |||||||||||
Increase (decrease) in cash | 3,937 | (250 | ) | 13 | ||||||||||||
Cash at beginning of year | 165 | 415 | 402 | |||||||||||||
Cash at end of year | $ | 4,102 | $ | 165 | $ | 415 | ||||||||||
Supplemental cash flow information: | ||||||||||||||||
Cash paid during the year for interest | $ | 512 | $ | 1,243 | $ | 157 | ||||||||||
Cash paid during the year for income taxes | $ | 1,312 | $ | 2,622 | $ | — | ||||||||||
Noncash financing activity—issuance of common stock | $ | 340 | $ | 312 | $ | — | ||||||||||
See accompanying notes to consolidated financial statements.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Years Ended July 1, 2000
F-7
Delta Apparel, Inc. (1) Basis of Presentation
and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in thousands)
NOTE 1—BASIS OF PRESENTATION
Prior to June 30, 2000, Delta Apparel, Inc. (together with its predecessors, the "Company"“Company”) was a wholly owned subsidiary of Delta Woodside Industries, Inc. ("(“Delta Woodside"Woodside” or the "Parent"“Parent”). In connection with a plan to separate its two apparel businesses, Delta Woodside transferred to the Company the assets, liabilities, and operations of its apparel business previously conducted by the following
divisions or subsidiaries of Delta Woodside:its Delta Apparel Company division and Rainsfordits plant located in Edgefield, South Carolina (collectively the "Predecessor Operations"“Predecessor Operations”). Effective June 30, 2000, Delta Woodside distributed all the common stock of the Company to the Delta Woodside stockholders (the "Distribution"“Distribution”). In connection with the Distribution, Delta Woodside contributed, as contributions to capital, all net debt amounts owed to it by the Company, with certain exceptions. Borrowings related to the Company under Delta Woodside'sWoodside’s credit agreement were repaid with the proceeds from borrowings under the Company'sCompany’s new credit agreement. Simultaneously with the Distribution, Delta Woodside distributed all of the common stock of Duck Head Apparel Company, Inc. (“Duck Head”) to the Delta Woodside stockholders.
The accompanying financial statements for periods prior to the Distribution reflect the operations and accounts of the Predecessor Operations and are for periods when the Company did not operate as a separate stand-alone company.
The following balance sheet as of July 1, 2000 details the adjustments
made related to the spin-off of Delta Apparel.
NOTE 2—SIGNIFICANT ACCOUNTING POLICIES
(a) Description of BusinessBusiness:The consolidated financial statements of Delta Apparel, Inc. and subsidiaries include the financial statements of Delta Apparel, Inc. and all wholly owned subsidiaries. The Company manufactures and sells T-shirts fleece goods, and sportswear to distributors, screen printers, and private label accounts. The Company operates manufacturing and distribution facilities in the Southeastern United States and in California, as well as manufacturing facilities in Mexico and Central America. The majority of the Company'sCompany’s raw materials are readily available, and thus it is not dependent on a single supplier. The Company'sCompany’s business constitutes a single reportable segment.
(b) Fiscal Year
Year:The Company'sCompany’s operations are based upon a fifty-two or fifty-three week fiscal year ending on the Saturday closest to June 30. Fiscal years 20002002, 2001 and 19982000 each consist of 52 weeks and fiscal year 1999fifty-two weeks.
(c) Cash:Cash consists of 53 weeks.
(c) Inventories
cash and temporary investments with maturities of three months or less when purchased.
(d) Inventories:Inventories are stated at the lower of cost (first-in, first-out method) or market. Estimated losses on inventories represent reserves for obsolescence, excess quantities, and irregulars and slow moving inventory. The Company estimates the losses on the basis of its assessment of the inventory'sinventory’s net realizable value based upon current market conditions and historical experience.
(d)
(e) Property, Plant, and Equipment
Equipment:Property, plant, and equipment are stated at cost. Depreciation and amortization is provided using the straight-line method over estimated useful lives of 3 to 20 years. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the improvements.
(e)
(f) Impairment of Long-Lived Assets
Assets:Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of anthe asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by whichcomparing the carrying amount of the assets exceedsto the fair value of the assets.
During fiscal year 1999, the Company continued to operate at a
loss, continued to downsize its operations and was not using
certain plant assets at their full capacity, which triggered an
impairment review of its long-lived assets. Based on the Company's
business plan for fiscal 2000, the trend in the apparel industry
to move production off-shore and the age and condition of the
Company's distribution facility in the United States the Company
determined that certain of its plant assets were impaired. The
Company calculated the present value of expectedor discounted cash flows of
certain plant assets consisting of land, buildings, machinery and
equipment to be held and used to determine the fair value of the
assets. Accordingly, in the fourth quarter of fiscal 1999, the
Company recorded an impairment charge of $1,415.
(f) Goodwill
Goodwill, which represented the excess purchase price over net
assets acquired, was amortized on a straight-line basis over 40
years. In 1998, the Company continued to incur operating losses,
the T-shirt apparel industry continued to see declines in margins
due to offshore competition and the Company lost its largest
customer in the fourth quarter of fiscal 1997. Concurrent with the
Company's annual planning process, the Company determined that the
future undiscounted cash flows were below the carrying value of
the goodwill. Accordingly, during the third quarter of fiscal 1998
the Company wrote off the goodwill of $7,240. The estimated fair
value was based on anticipated future cash flows discounted at a
rate commensurate with the risk involved.
flow.
(g) Accounts Receivable and Revenue Recognition
Recognition:Sales of goods are recognized upon shipment of the goods to the customer. The Company generally does not require collateral. The Company provides allowances for merchandise returns, claims and markdowns based on historical credits issued as a percentage of sales and periodic evaluations of the aging of accounts receivable. 33
F-8
(h) Related Party Transactions
Through April, 2000, the Company participated in a cash management
system maintained by Delta Woodside. Under this system, excess
cash was forwarded to Delta Woodside each day, reducing the due to
Parent, and cash requirements were funded daily by Delta Woodside,
increasing the due to Parent. Interest was charged on loan payable
to Delta Woodside balances based on the weighted-average cost of
Delta Woodside's borrowings. In addition, through fiscal year 1999
the Company incurred management fees from Delta Woodside for
various corporate services, including management, treasury,
computer, benefits, payroll, auditing, accounting and tax
services. For these services, Delta Woodside charged actual cost
based on relative usage and other factors which, in the opinion of
management, represented a reasonable and appropriate method of
allocation.
(i) Income Taxes
Taxes:Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company's
During the year ended July 1, 2000, the Company’s operations were includedreported in the consolidated Federalfederal tax return of Delta Woodside Industries, Inc. The Federal income tax obligation or refund under the corporate tax sharing arrangement that was allocated to the Company was determined as if the Company was filing a separate Federal income tax return. Until mid-May 2000, the Company’s federal tax liability or receivable was paid to or was received from Delta Woodside.
Under the tax sharing agreement entered into by and between Delta Woodside, Duck Head and the Company in connection with the Distribution (the “Tax Sharing Agreement”), the allocation of tax liabilities and benefits is as follows:
-
(a) | For each taxable year ending July 3, 1999 and prior, Delta Woodside shall be responsible for paying any increase in federal income taxes, and shall be entitled to receive the benefit of any refund of or saving in federal income taxes, that results from any tax proceeding with respect to any returns relating to federal income taxes of the Delta Woodside pre-spin-off consolidated federal income tax group (which included the Delta Apparel and Duck Head divisions of Delta Woodside). | ||
(b) | For the taxable period ending July 1, 2000, Delta Woodside shall be responsible for paying any federal income taxes, and shall be entitled to any refund of or savings in federal income taxes, with respect to the Delta Woodside pre-spin-off consolidated federal income tax group. |
On August 6, 2001, the tax sharing agreement between Delta Woodside Industries, Inc., Duck Head Apparel Company, Inc. and Delta Apparel, Inc. was amended. The amendment includes a provision that all disputes arising under the Agreement (other than claims in equity) shall be resolved by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association.
(i) Advertising Costs
Costs:Advertising costs are expensed as incurred. Advertising costs amount to $792, $1,300$904, $818 and $852,$792 in fiscal 2002, 2001 and 2000, 1999 and 1998,
respectively.
(k) Computation of Proforma Net
(j) Earnings Per ShareShare:Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the year. The computation of diluted earnings per share includes the dilutive effect of stock options and non-vested stock awards. Proforma net earnings per share for the year ended July 1, 2000 is calculated by dividing the net earnings by the weighted-average common shares outstanding of Delta Woodside adjusted for the distribution ratio assuming that shares distributed in the Distribution were outstanding the entire year. The weighted-average shares do not include securities that would be anti-dilutive for each of the periods presented.
(l)
(k) Cotton Procurements
Procurements:The Company contracts to buy cotton with future delivery dates at fixed prices in order to reduce the effects of fluctuations in the prices of cotton used in the manufacture of its products. These contracts permit settlement by delivery and are not used for trading purposes. The Company commits to fixed prices on a percentage of its cotton requirements up to eighteen months in the future. If market prices for cotton fall below the Company'sCompany’s committed fixed costs and it is estimated that the costs of cotton are not recoverable in future sales of finished goods, the differential is charged to income at that time.
34
(m)
(l) Use of Estimates
ManagementEstimates:The preparation of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting principles.principles requires the Company’s management to use estimates and assumptions that affect the reported amounts and disclosures of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
(n)
F-9
(m) Stock Option Plan
Plan:The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board ("APB"(“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, in accounting for its fixed plan stock options. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. SFAS No. 123, Accounting for Stock-Based Compensation, established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic value-based method of accounting described above, and has adopted the disclosure requirements of SFAS No. 123.
(o)123 (See Note 10).
(n) Comprehensive Income (Loss)
Income:No statements of comprehensive income have been included in the accompanying financial statements since comprehensive income (loss) and net income (loss) would be the same.
(o) Fair Value of Financial Instruments:The Company uses financial instruments in the normal course of its business. The carrying values approximate fair value for financial instruments that are short-term in nature, such as cash, accounts receivable, accounts payable and accrued expenses. The Company estimates that the carrying value of the Company’s long-term debt approximates fair value based on the current rates offered to the Company for debt of the same remaining maturities.
(p) Derivatives:From time to time, the Company enters into forward contracts, option agreements or other instruments to limit its exposure to fluctuations in raw material prices with respect to cotton purchases. The Company determines at inception whether the derivative instruments will be accounted for as hedges. The option agreements purchased during fiscal year 2002 are derivative instruments but are not accounted for as hedges. The option agreements are marked to market on a quarterly basis with adjustments to the fair market value recorded in operations. The fair value of these derivative instruments at June 29, 2002 was $445 and was included in other current assets in the accompanying balance sheet.
(q) Reclassifications:Certain reclassifications have been made to prior year financial statements to conform to the fiscal 2002 presentation.
(r) Recent Accounting Pronouncements
Pronouncements:In June 1998,July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) 141, Business Combinations, and SFAS 142, Goodwill and Other Intangible Assets. The Company adopted SFAS 141 and 142 in its first quarter of fiscal year 2002. The adoption of SFAS 141 and SFAS 142 had no impact on the Company’s financial statements.
In August 2001, the FASB issued SFAS 133,143, Accounting for Derivative
Instruments and Hedging Activities,Asset Retirement Obligations, which was subsequently
deferred by SFAS 137 and amended by SFAS 138. SFAS 133 establishesaddresses financial accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts,obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company is required and plans to adopt the provisions of SFAS No. 143 for hedging activities. SFAS 133 is effective for all fiscal years
beginning after June 15, 2000.the quarter ending September 28, 2002. The Company does not believe that the applicationadoption of SFAS No. 133143 will have a material impact on itsthe Company’s financial statements.
On December 31, 1999,
In August 2001, the SECFASB issued SABSFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The Company is required and plans to adopt the provisions of SFAS No. 101, Revenue
Recognition in Financial Statements. On June 26, 2000,144 for the SEC
issued SAB 101B which delays the implementation date of SAB 101 to
the fourth quarter of 2000.ending September 28, 2002. The Company does not believe that the applicationadoption of SAB 101SFAS 144 will have a material impact on itsthe Company’s financial statements.
In April 2000, the FASB issued FASB Interpretation No. 44,
Accounting for Certain Transactions Involving Stock Compensation
("FIN 44") which contains rules designed to clarify the
application of APB Opinion No. 25. FIN 44 is effective July 1,
2000. The Company does not believe FIN 44 will have a material
impact on its financial statements.
(3) Inventories
NOTE 3—INVENTORIES
Inventories consist of the following:
July 1, July 3,
2000 1999
--------------- --------------
Raw materials $ 2,785 2,731
Work in process 11,903 7,768
Finished goods 13,519 16,535
--------------- --------------
$ 28,207 27,034
=============== ==============
35
(4) Property, Plant and Equipment
June 29, | June 30, | |||||||
2002 | 2001 | |||||||
Raw materials | $ | 4,644 | $ | 2,631 | ||||
Work in process | 10,510 | 12,513 | ||||||
Finished goods | 20,329 | 26,475 | ||||||
$ | 35,483 | $ | 41,619 | |||||
F-10
NOTE 4—PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
Estimated July 1, July 3,
useful life 2000 1999
----------------- --------------- --------------
Land and land improvements N/A $ 1,099 1,778
Buildings 20 years 7,613 12,043
Machinery and equipment 10-15 years 37,486 57,825
Computers and software 3 years 2,595 2,310
Furniture and fixtures 7 years 382 432
Leasehold improvements 3-10 years 733 733
Automobiles 5 years 63 50
Construction in progress N/A 181 63
--------------- --------------
50,152 75,234
Less accumulated depreciation and
amortization (23,281) (43,793)
--------------- --------------
$ 26,871 31,441
=============== ==============
(5) Accrued Expenses
Estimated | June 29, | June 30, | ||||||||||
Useful Life | 2002 | 2001 | ||||||||||
Land and land improvements | N/A | $ | 1,356 | $ | 1,106 | |||||||
Buildings | 10-20 years | 8,877 | 8,370 | |||||||||
Machinery and equipment | 5-15 years | 41,650 | 37,967 | |||||||||
Computers and software | 3 years | 3,769 | 3,349 | |||||||||
Furniture and fixtures | 7 years | 514 | 428 | |||||||||
Leasehold improvements | 3-10 years | 806 | 783 | |||||||||
Automobiles | 5 years | 185 | 116 | |||||||||
Construction in progress | N/A | 941 | 587 | |||||||||
58,098 | 52,706 | |||||||||||
Less accumulated depreciation and amortization | (35,106 | ) | (28,956 | ) | ||||||||
$ | 22,992 | $ | 23,750 | |||||||||
NOTE 5—ACCRUED EXPENSES
Accrued expenses consist of the following:
July 1, July 3,
2000 1999
---------------- ---------------
Accrued employee compensation and benefits $ 5,876 2,619
Taxes accrued and withheld 188 699
Accrued insurance 524 1,016
Accrued advertising 102 333
Other 1,726 692
---------------- ---------------
$ 8,416 5,359
================ ===============
(6) Long-term Debt
June 29, | June 30, | |||||||
2002 | 2001 | |||||||
Accrued employee compensation and benefits | $ | 6,007 | $ | 5,194 | ||||
Taxes accrued and withheld | 296 | 233 | ||||||
Accrued insurance | 552 | 494 | ||||||
Accrued advertising | 91 | 98 | ||||||
Other | 1,387 | 1,662 | ||||||
$ | 8,333 | $ | 7,681 | |||||
NOTE 6—LONG-TERM DEBT
Long-term debt consists of the following:
July 1, July 3,
2000 1999
---------------- ----------------
Term loan facility secured by property of the Company, interest at
prime rate (9.5% at July 1, 2000) or 2% over Libor rate payable
monthly, principal payable in monthly installments of $166 with
final payment due May 1, 2005 $ 9,667 --
Promissory note -- 339
---------------- ----------------
9,667 339
Less current installments 2,000 239
---------------- ----------------
Long-term debt, excluding current installments $ 7,667 100
================ ================
June 29, | June 30, | |||||||
2002 | 2001 | |||||||
Revolving credit facility secured by receivables and inventory of the Company, interest at prime rate or 2% over LIBOR rate (5.980% at June 30, 2001) due May 1, 2005 | $ | — | $ | 6,435 | ||||
Term loan facility secured by property of the Company, interest at prime rate or 2% over LIBOR rate (3.844% and 6.342% at June 29, 2002 and June 30, 2001, respectively) payable monthly, principal payable in monthly installments of $166 with final payment due May 1, 2005 | 5,667 | 7,667 | ||||||
5,667 | 14,102 | |||||||
Less current installments | 2,000 | 8,435 | ||||||
Long-term debt, excluding current installments | $ | 3,667 | $ | 5,667 | ||||
In May 2000, the Company entered into a credit agreement with a lending institution, under which the lender has provided the Company with a $105 year $10.0 million term loan and a 3 year $25$25.0 million revolving credit facility. All loans under the credit agreement will bear interest based on an adjusted LIBOR rate plus an applicable margin or the bank'sbank’s prime rate plus an applicable margin. The Company has granted the lender a first mortgage lien on or security interests in substantially all of its assets. The Company has the option to increase the revolving credit facility from $25$25.0 million to $30$30.0 million, provided that no event of defaultsdefault exists under the facility.
F-11
The credit agreement contains limitations on, or prohibitions of, cash dividends, stock purchases, related party transactions, mergers, acquisitions, sales of assets, indebtedness and investments. 36
Principal of the term loan will be repaid in monthly installments based on a 60 month amortization, with a payment of all outstanding principal and interest required upon earlier termination of the credit facility. The Company will make the following payments related to its long-term debt: $2.0 million in fiscal year 2003; $2.0 million in fiscal year 2004; and $1.7 million in fiscal year 2005.
Under the revolving credit facility, the Company is able to borrow up to $25.0 million (including a $10.0 million letter of credit subfacility) subject to borrowing base limitations based on the accounts receivable and inventory levels. Annual facility fees are .25% of the amount by which the revolving loan limit exceeds the average daily principal balance of the outstanding revolving loans and letter of credit accommodations during the immediately preceding month. The Company had no borrowings under the revolving credit facility at July 1, 2000.June 29, 2002. At July 1, 2000June 29, 2002 the Company had the ability to borrow $24.9an additional $25.0 million under the revolving credit facility.
The aggregate maturities of long-term debt are as follows:
Fiscal year
-----------
2001 $ 2,000
2002 2,000
2003 2,000
2004 2,000
2005 1,667
----------------
$ 9,667
================
(7) Income Taxes
The Company's operations, which generated taxable income of
approximately $4.8 million, will be reported in the consolidated Federal
tax return of Delta Woodside. The Federal income tax obligation or
refund under the corporate tax sharing arrangement that is allocated to
the Company is substantially determined as if the Company was filing a
separate Federal income tax return. Until mid-May 2000, the Company's
Federal tax liability or receivable was paid to or was received from
Delta Woodside. As a result of the Distribution, the Company will not be
included in the consolidated returns of Delta Woodside in future years.
NOTE 7—INCOME TAXES
Federal and state income tax expense (benefit) was as follows:
Year ended
----------------------------------------------
July 1, July 3, June 27,
2000 1999 1998
------------ ------------- -------------
Current:
Federal $ -- -- --
State 60 (90) 108
------------ ------------- -------------
Total current 60 (90) 108
------------ ------------- -------------
Deferred:
Federal -- -- --
State -- -- --
------------ ------------- -------------
Total deferred -- -- --
------------ ------------- -------------
Income tax expense (benefit) $ 60 (90) 108
============ ============= =============
37
Year ended | ||||||||||||||
June 29, | June 30, | July 1, | ||||||||||||
2002 | 2001 | 2000 | ||||||||||||
Current: | ||||||||||||||
Federal | $ | 3,595 | $ | 1,276 | $ | — | ||||||||
State | 326 | 261 | 60 | |||||||||||
Total current | 3,921 | 1,537 | 60 | |||||||||||
Deferred: | ||||||||||||||
Federal | (212 | ) | (486 | ) | — | |||||||||
State | (521 | ) | (64 | ) | — | |||||||||
Total deferred | (733 | ) | (550 | ) | — | |||||||||
Income tax expense | $ | 3,188 | $ | 987 | $ | 60 | ||||||||
A reconciliation between actual income tax expense (benefit) and the income tax expense (benefit) computed using the Federal statutory income tax rate of 34% in 2002 and 2001 and 35% in 2000 is as follows:
Year ended
----------------------------------------------
July 1, July 3, June 27,
2000 1999 1998
------------ ------------- ------------
Income tax expense (benefit) at the
statutory rate $ 1,676 (6,748) (8,470)
State income tax expense (benefit) net
of federal income tax effect 39 (59) 70
Valuation allowance adjustments 854 6,112 5,217
Nondeductible amortization and other 554 127 2,538
permanent differences
Other -- 478 753
Spin-off adjustment (3,063) -- --
------------ ------------- ------------
Income tax expense (benefit) $ 60 (90) 108
============ ============= ============
Year ended | |||||||||||||
June 29, | June 30, | July 1, | |||||||||||
2002 | 2001 | 2000 | |||||||||||
Income tax expense at the statutory rate | $ | 3,284 | $ | 3,728 | $ | 1,676 | |||||||
State income tax expense net of federal income tax effect | 215 | 172 | 39 | ||||||||||
Valuation allowance adjustments | (631 | ) | (3,205 | ) | (2,230 | ) | |||||||
Nondeductible amortization and other permanent differences | (71 | ) | (16 | ) | 554 | ||||||||
Other | 391 | 308 | 21 | ||||||||||
Income tax expense | $ | 3,188 | $ | 987 | $ | 60 | |||||||
F-12
Significant components of the Company'sCompany’s deferred tax assets and liabilities are as follows:
July 1, July 3,
2000 1999
--------------- ---------------
Deferred tax assets:
Net operating loss carryforward $ 4,054 3,968
Investment tax credit -- 617
Currently nondeductible accruals 2,026 2,841
Other 124 203
--------------- ---------------
Gross deferred tax assets 6,204 7,629
Less valuation allowance (4,682) (3,828)
--------------- ---------------
Net deferred tax assets 1,522 3,801
--------------- ---------------
Deferred tax liabilities:
Depreciation (1,456) (3,801)
Other (66) --
--------------- ---------------
Gross deferred tax liabilities (1,522) (3,801)
--------------- ---------------
Net deferred tax liability $ -- --
=============== ===============
June 29, | June 30, | |||||||||
2002 | 2001 | |||||||||
Deferred tax assets: | ||||||||||
Net operating loss carryforward | $ | 542 | $ | 689 | ||||||
Currently nondeductible accruals | 2,304 | 2,049 | ||||||||
Other | — | — | ||||||||
Gross deferred tax assets | 2,846 | 2,738 | ||||||||
Less valuation allowance | (58 | ) | (689 | ) | ||||||
Net deferred tax assets | 2,788 | 2,049 | ||||||||
Deferred tax liabilities: | ||||||||||
Depreciation | (721 | ) | (1,108 | ) | ||||||
Other | (1,648 | ) | (1,255 | ) | ||||||
Gross deferred tax liabilities | (2,369 | ) | (2,363 | ) | ||||||
Net deferred tax asset (liability) | $ | 419 | $ | (314 | ) | |||||
The valuation allowance for deferred tax assets as of July 1, 2000June 29, 2002 and July 3, 1999June 30, 2001 was $4,682$58 and $3,828,$689, respectively. The net change in the total valuation allowance for the years ended July 1, 2000, July 3, 1999June 29, 2002 and June 27, 199830, 2001 was an increasea decrease of $854, $6,112$631 and $5,217,$3,205, respectively. The Company's grossCompany’s deferred tax assetsasset related to the net operating loss carryforwards are reduced by a valuation allowance to netresult in deferred tax assets considered by management to be more likely than not realizable. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.
As of July 1, 2000,June 29, 2002, the Company had regular tax loss carryforwards of approximately $8.8 million for Federal purposes and approximately $17.5$9.8 million for State purposes after the spin-off transaction.purposes. These carryforwards expire at various intervals through 2019.
(8) Affiliated Party Transactions
Due to (from) related parties consists of the following:
NOTE 8—LEASES
The Company has several noncancellable operating leases relating to buildings, office equipment, machinery and equipment, and computer systems. Certain land and building leases have renewal options generally for periods ranging from 5 to 10 years.
Future minimum lease payments under noncancellable operating leases as of July 1, 2000June 29, 2002 were as follows:
Fiscal year
-----------
2001 $ 883
2002 356
2003 325
2004 312
2005 286
Thereafter 158
----------------
$ 2,320
================
Fiscal Year | ||||
2003 | $ | 1,554 | ||
2004 | 1,535 | |||
2005 | 1,447 | |||
2006 | 989 | |||
2007 | 282 | |||
Thereafter | 1,060 | |||
$ | 6,867 | |||
Rent expense for all operating leases was approximately $1,270, $1,410$1,548, $1,369 and $1,806$1,270 for fiscal years 2002, 2001, and 2000, 1999respectively.
NOTE 9—EMPLOYEE BENEFIT PLANS
The Company’s defined contribution plan, the Savings and 1998,Investment Plan, allows employees to make pre-tax contributions under Section 401(k) of the Internal Revenue Code. The Plan is open to any U.S. employee who has attained the age of eighteen, at the beginning of the next quarter after completing three months of service. The Plan provides for the Company to make a guaranteed match of the employee’s contributions. The Company contributed approximately $217 and $121 to the Savings and Investment Plan during fiscal 2002 and 2001, respectively.
(10) Employee Benefit Plans
F-13
The Company has a Deferred Compensation Plan that permits certain management employees to defer a portion of their compensation. Deferred compensation accounts are credited with interest and are distributable after retirement, disability or employment termination. The Plan is unfunded and benefits are paid from the general assets of the Company. The Company expensed approximately $96 and $66 to the Deferred Compensation Plan during fiscal 2002 and 2001, respectively.
Prior to June 30, 2000, the Company participated in the Delta Woodside Retirement and 401(k) and Deferred Compensation Plans. On September 27, 1997,During fiscal 2000, the Delta Woodside Employee Retirement Plan
("Retirement Plan") merged into the Delta Woodside Employee Savings and
Investment Plan ("401(k) Plan"). The Retirement Plan qualified as an
Employee Stock Ownership Plan ("ESOP") under the Internal Revenue Code as
a defined contribution plan. The Company contributedexpensed approximately $119 $132 and $71$25 to the 401(k) Plan during fiscalthese plans, respectively. Prior to June 30, 2000, 1999 and 1998,
respectively. The Company contributed approximately $0, $90 and $155 to
the Retirement Plan and/or 401(k) Plan during fiscal 2000, 1999 and 1998,
respectively.
The Company also participated in a 501(c)(9) trust, the Delta Woodside Employee Benefit Plan and Trust ("Trust"(“Trust”). The Trust collectscollected both employer and employee contributions from the Company and makesmade disbursements for health claims and other qualified benefits.
Effective with
NOTE 10—STOCK OPTIONS AND INCENTIVE STOCK AWARDS
Prior to June 30, 2000, the spin-off transaction, the Company established its own
401(k) Plan, with benefits similar to the Delta Woodside 401(k) Plan.
The Company also participated in the Delta Woodside Incentive Stock Award Plan and Stock Option Plan. Under both Plans, the Company recognized
expenses of approximately $221, $521 and $166 for fiscal years 2000, 1999
and 1998, respectively. Effective with the spin-off transaction, the Company established the Delta Apparel Stock Option Plan (the "Option Plan"“Option Plan”) and the Delta Apparel Incentive Stock Award Plan (the "Award Plan"“Award Plan”).
The Company has elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FASB Statement No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), requires use of option valuation models that were not developed for use in valuing employee stock options.
Information included in this footnote has been adjusted to reflect the 2-for-1 stock split announced by the Company on August 15, 2002.
Under the Option Plan, the Company authorized the grant of options of up to 1,000,000 shares of common stock. Options are granted by the compensation grants committee of the Company'sCompany’s board of directors will have the discretion to grant options for up to an
aggregate maximum of 500,000 common shares. Participation in the Option
Plan is limited to key and middle level executives.
personnel for the purchase of the Company’s stock at prices not less than the fair market value of the shares on the dates of grant. Under APB 25, no compensation expense was recognized by the Company since the exercise price of the Company’s employee stock options equals the market price of the underlying stock on the date of grant.
Under the Award Plan, the compensation grants committee of the Company'sCompany’s board of directors will havehas the discretion to grant awards for up to an aggregate maximum of 200,000400,000 common shares. The Award Plan authorizes the compensation grants committee to grant to officers and other key management employees or the middle level management employees of the Company or any of its subsidiaries rights to acquire common shares at a cash purchase price of $0.01 per share. As of July 1, 2000, no options orJune 29, 2002, awards covering 117,800 shares have been granted and awards covering 70,680 shares have been exercised under the Award Plan. The Award Plan contains certain provisions that require it to be accounted for as a variable plan under APB 25. Accordingly, compensation expense is recognized by the Company as the market value of the stock increases and decreases from the grant date. Compensation expense recorded under the Award Plan was $1,945, $750 and $278 in fiscal 2002, 2001 and 2000, respectively.
Pro forma information regarding net income and earnings per share is required by SFAS 123 determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions: risk-free interest rates of 5.5%, dividend yield of 0%, volatility factor of the expected market price of the Company’s common stock of .557, and an expected life of the option of 4 years.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
F-14
For purposes of pro forma disclosures, the estimated fair value of the options under the Option Plan orand the Award Plan.
(11) Fair Value of Financial InstrumentsPlan is amortized to expense over the options’ vesting period. The Company uses financial instruments in the normal course of its
business. The carrying values approximate fair values for financial
instruments that are short-term in nature, such as cash, accounts
receivable, accounts payable and accrued expenses. The Company estimates
that the carrying valueCompany’s pro forma information follows (in thousands, except per share amounts):
2002 | 2001 | |||||||
Pro forma net income | $ | 6,659 | $ | 9,879 | ||||
Pro forma basic net income per common share | 1.53 | 2.06 | ||||||
Pro forma diluted net income per common share | 1.46 | 2.00 |
A summary of the Company's long-term debt approximates fair
value based onCompany’s stock option activity under the current rates offeredOption Plan and the Award Plan and related information are as follows:
2002 | 2001 | |||||||||||||||
Weighted | Weighted | |||||||||||||||
Average | Average | |||||||||||||||
Shares | Exercise Price | Shares | Exercise Price | |||||||||||||
Outstanding at beginning of year | 393,680 | $ | 3.880 | — | — | |||||||||||
Granted | — | — | 463,200 | $ | 3.459 | |||||||||||
Exercised | (85,810 | ) | $ | 3.447 | (47,120 | ) | $ | 0.005 | ||||||||
Forfeited | — | — | (22,400 | ) | $ | 3.326 | ||||||||||
Outstanding at end of year | 307,870 | $ | 4.001 | 393,680 | $ | 3.880 | ||||||||||
Exercisable at end of year | 18,500 | — | ||||||||||||||
Weighted-average fair value of options granted during the year | — | $ | 2.71 | |||||||||||||
Shares available for future grants | 959,200 | 959,200 | ||||||||||||||
Exercise prices for options outstanding as of June 29, 2002 ranged from approximately $4.66 to $6.13, except for 47,120 shares covered by awards outstanding under the CompanyAward Plan for debtwhich the exercise price was $0.01. The weighted average remaining contractual life of the
same remaining maturities.
39
(12) Commitments and Contingencies
those options is approximately 3 years.
NOTE 11—COMMITMENTS AND CONTINGENCIES
(a) Litigation
The
At times, the Company is a defendant in a legal actionactions involving a product liability claim.claims. The Company believes that, as a result of legal defenses, insurance arrangements, and indemnification provisions with parties believed to be financially capable, this actionany such actions should not have a material effect on its operations, financial condition, or liquidity.
(b) Postretirement Benefits
The Company provides postretirement life insurance benefits for certain retired employees. The Planplan is noncontributory and is unfunded. ExpensesBenefits and expenses are paid from the general assets of the Company.Company and recorded as they are incurred. All of the employees in the Planplan are fully vested.vested and the plan was closed to new employees in 1990. The Company has applieddiscount rate used in determining the transition provisionsliability was 7.25% and 7.50% as of SFAS 106
Employers Accounting for Postretirement Benefits Other Than
PensionsJune 29, 2002 and accordingly is recognizing the transition obligation
on a straight-line bases over the average remaining life
expectancy of the Plan participants, which is nine years.
The postretirement liability recognized on the balance sheet was
$1,269 and $1,200 for fiscal years 2000 and 1999,June 30, 2001, respectively.
The transition obligation will be recognized through fiscal 2009.
June 29, | June 30, | ||||||||
2002 | 2001 | ||||||||
Change in benefit obligations: | |||||||||
Balance at beginning of year | 1,167 | 1,269 | |||||||
Interest cost | 74 | 58 | |||||||
Benefits paid | (100 | ) | — | ||||||
Actuarial adjustment | (16 | ) | (160 | ) | |||||
Balance at end of year | 1,125 | 1,167 | |||||||
F-15
(c) Cotton Procurements
Purchase Contracts
The Company has entered into agreements, and has fixed prices, to purchase cotton and natural gas for use in its manufacturing operations. At July
1, 2000,June 29, 2002, minimum payments under these contracts to purchase cotton and natural gas with non-cancelable contract terms were $10,799.
$14,987 and $130, respectively.
(d) Letters of Credit
As of July 1, 2000,June 29, 2002, the Company had an outstanding standby letterletters of credit for $125. This letter of credit expires on June 30,
2001.
(13) Quarterly Financial Information (Unaudited)
totaling $380.
NOTE 12—QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Presented below is a summary of the unaudited consolidated quarterly financial information for the years ended July 1, 2000June 29, 2002 and July 3, 1999.
2000 quarter ended
----------------------------------------------------------------------------
October 2 January 1 April 1 July 1
------------------ ------------------ ------------- ---------------
Net sales $ 28,659 21,561 27,293 36,953
Gross profit 3,693 3,017 4,956 8,656
Operating income 1,777 1,243 2,926 6,260
Net income (loss) (459) (749) 735 5,202
1999 quarter ended
----------------------------------------------------------------------------
September 28 December 26 April 1 July 1
------------------ ------------------ ------------- ---------------
Net sales $ 25,131 17,950 20,598 43,100
Gross profit (loss) 4,076 1,180 (695) 1,093
Operating income (loss) 667 (1,290) (3,362) (5,717)
Net loss (1,520) (3,496) (5,788) (8,386)
During the fourth quarter of fiscal year 1999, the Company recognized an
impairment loss of $1,415 on certain property and equipment that was
written down to estimated net realizable value.
40
MARKET INFORMATION FOR COMMON STOCK
The common stock of the Company is listed on the American Stock Exchange. The
common stock was first traded on the Exchange on June 30, 2000 concurrent with2001.
2002 Quarter Ended | 2001 Quarter Ended | |||||||||||||||||||||||||||||||
September 29 | December 29 | March 30 | June 29 | September 30 | December 30 | March 31 | June 30 | |||||||||||||||||||||||||
Net Sales | $ | 31,014 | $ | 24,337 | $ | 32,860 | $ | 43,390 | $ | 30,649 | $ | 26,370 | $ | 27,975 | $ | 35,406 | ||||||||||||||||
Gross profit | 2,967 | 3,741 | 6,242 | 8,378 | 7,241 | 4,717 | 5,790 | 5,551 | ||||||||||||||||||||||||
Operating income | 330 | 1,213 | 3,140 | 5,654 | 4,587 | 1,963 | 3,048 | 2,705 | ||||||||||||||||||||||||
Net income | 64 | 678 | 1,877 | 3,853 | 3,518 | 1,397 | 2,183 | 2,879 | ||||||||||||||||||||||||
Basic EPS * | $ | 0.01 | $ | 0.15 | $ | 0.46 | $ | 0.97 | $ | 0.73 | $ | 0.29 | $ | 0.46 | $ | 0.60 | ||||||||||||||||
Diluted EPS * | $ | 0.01 | $ | 0.14 | $ | 0.43 | $ | 0.92 | $ | 0.73 | $ | 0.28 | $ | 0.44 | $ | 0.58 |
* | Adjusted for 2-for-1 stock split effective as of September 20, 2002 |
NOTE 13—STOCK SPLIT
On August 15, 2002, the Delta Apparel Distribution. On that date, the high and low sales prices for
Delta Apparel's common stock were $9.25 and $8.75, respectively. Prior to the
Delta Apparel Distribution, Delta Apparel was a wholly-owned subsidiary of
Delta Woodside and there was no established public trading market for the
Company's shares.
HOLDERS
At September 20, 2000, there were approximately 1,707 holders of record of
common stock.
DIVIDENDS
No dividends were declared on the Company's common stock in fiscal 2000. Subject
to the provisions of any outstanding blank check preferred stock, the holders of
Delta Apparel common stock are entitled to receive whatever dividends, if any,
may be declared from time to time by the Delta Apparel board of directors in its
discretion from funds legally available for that purpose. Delta Apparel's credit
agreement permits the payment of cash dividends in an amount up to 25% of
cumulative net income (excluding extraordinary or unusual non-cash items),
provided that no event of default exists or would result from that payment and
after the payment at least $6.0 million remains available to borrow under the
revolving credit facility.
Delta Apparel expects that it will from time to time consider the advisability
of instituting a dividend program. In general, any future cash dividend payments
will depend upon Delta Apparel's earnings, financial condition, capital
requirements, compliance with loan covenants and other relevant factors.
CORPORATE DIRECTORY
Delta Apparel, Inc.
2750 Premiere Parkway
Suite 100
Duluth, Georgia 30097
Corporate Officers
Robert W. Humphreys
President and Chief Executive Officer
Herbert M. Mueller
Vice President, Chief Financial Officer and Treasurer Board of Directors William F. Garrett
President and Chief Executive Officer
Delta Woodside Industries, Inc.
(Textile Fabrics Manufacturer)
C. C. Guy
Retired businessman
Robert W. Humphreys
President and Chief Executive Officer
Delta Apparel, Inc.
Dr. James F. Kane
Dean Emeritus, Collegeapproved a 2-for-1 stock split, in the form of Buisness
University of South Carolina
Dr. Max Lennon
President
Mars Hill College
E. Erwin Maddrey, II
President
Maddrey & Associates
(Investment/Consulting)
Buck A. Mickel
Vice President and Director
Micco Corporation
(Real estate and business investments)
41
Form 10-K
Upon written request, the Company will furnish without charge to any Delta
Apparel stockholder a copy100% stock dividend of the Company's Annual ReportCompany’s common stock. On September 20, 2002, shareholders of record on Form 10-KSeptember 6, 2002 will receive one additional share of common stock for each one share held of record. All references in the
fiscal year ended July 1, 2000 including financial statements with regard to the number of shares or average number of shares of common stock and schedules, but
excluding exhibits. Requests should be directed to:
Herbert M. Mueller
Vice President, Chief Financial Officerrelated prices, dividends and Treasurer
Delta Apparel, Inc.
2750 Premiere Parkway
Suite 100
Duluth, Georgia 30097
Email: investor.relations@deltaapparel.com
----------------------------------
Annual Meeting
The Annual Meeting of Stockholders of Delta Apparel, Inc. will be held on
Tuesday, November 7, 2000 at 10:30 a.m. atper share amounts have been restated to reflect the Gunter Theater, 320 South Main
Street, Greenville, South Carolina.
42
EXHIBIT 21
43
Subsidiaries of
Delta Apparel, Inc.
Listed below are the subsidiaries of Delta Apparel, Inc.:
(1) Delta Apparel Honduras, S.A., a Honduran sociedad anonima.
2,496 shares are owned by Delta Apparel, Inc. One (1) share is owned by
each of four directors of Delta Apparel, Inc. Delta Apparel, Inc. has
the right to acquire such director-owned shares at a nominal price.
(Honduran law requires a sociedad anonima to have at least five
shareholders.)
(2) Delta Campeche, S.A. de C.V., a Mexican sociedad anonima de capital
variable.
49 shares are owned by Delta Apparel, Inc. One (1) share is owned by
Robert W. Humphreys.
442-for-1 stock split.
F-16
SCHEDULE II — CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
DELTA APPAREL, INC. AND SUBSIDIARIES
(In thousands)
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Beginning | Ending | |||||||||||||||
Balance | Expense | Write-Offs | Balance | |||||||||||||
2002 | $ | 1,344 | $ | 339 | $ | (714 | ) | $ | 969 | |||||||
2001 | 1,910 | 921 | (1,487 | ) | 1,344 | |||||||||||
2000 | 3,199 | 269 | (1,558 | ) | 1,910 |
RETURNS AND ALLOWANCES
Beginning | Ending | |||||||||||||||
Balance | Expense | Credits Issued | Balance | |||||||||||||
2002 | $ | 468 | $ | 4,175 | $ | (4,100 | ) | $ | 543 | |||||||
2001 | 516 | 3,519 | (3,567 | ) | 468 | |||||||||||
2000 | 1,855 | 1,196 | (2,535 | ) | 516 |
TOTAL
Beginning | Write-Offs/ | Ending | ||||||||||||||
Balance | Expense | Credits Issued | Balance | |||||||||||||
2002 | $ | 1,812 | $ | 4,514 | $ | (4,814 | ) | $ | 1,512 | |||||||
2001 | 2,426 | 4,440 | (5,054 | ) | 1,812 | |||||||||||
2000 | 5,054 | 1,465 | (4,093 | ) | 2,426 |
F-17